Sale-leaseback is gaining traction with institutional investors: I have been actively working with institutional sellers—primarily public and private triple-net REITs—as well as large owner/operators such as Ruby Tuesday, Inc. for whom we've done over $75 million in sale-leaseback transactions. Like Ruby Tuesday, many retailers who own their real estate have opted to employ the sale-leaseback strategy to free up resources and improve their balance sheet – often paying down debt, repurchasing stock, and deploying the capital back into their store base and business. Faris Lee has successfully advised such sellers to leverage a high-demand market to expand their potential buyer pool. Instead of taking the “easy” route of selling their entire portfolio to a single institutional buyer, we have advised them to market their assets individually, thereby accessing a much wider buyer pool. This buyer pool will usually pay lower cap rates and is often comprised of 1031 exchange buyers, many from California, who are buying outside the state. The sellers obtain a stronger price, while the buyer has an opportunity to own a property with a credit tenant, attractive annual returns, and long-term growth potential.

California private capital is moving out of state: Investors residing in California are looking to expand their scope of opportunity by moving outside of California and into growth markets throughout the country. As the most populous state in the country, and home to some of the world's greatest wealth, the California investment market is highly competitive and is characterized by much lower cap rates and higher values. As investors waiting on the sidelines for meaningful transactions grow impatient, they have increasingly been placing their capital out of state. With net-lease investments, which typically require no active management, it is entirely feasible to acquire properties away from the investor's home state. Markets like Texas, Arizona, North and South Carolina, Florida and other growth states provide higher yields, strong fundamentals in terms of demographics and local economies, and allow the investor to diversify geographically. The California-based, multifamily 1031 exchange buyer is a highly active buyer pool that Faris Lee tracks and markets to. The cap rate environment for multifamily and apartment investments is also highly compressed, and many of the sellers of these assets in turn look for passive, management-free investments as replacement properties. In many cases our clients are selling their multifamily properties in the 4% cap rate range in California and invest into net leased investments out of state at higher yields.

Investors take on more risk: We are experiencing a high number of pre-sale transactions, mainly on net-leased drug store, big box retail and ground-leased properties. These are properties that are being acquired while under construction—or in many cases before construction has even commenced. The developer hedges fluctuations in cap rate and other market risks by “locking in” the buyer well in advance of rent commencement. While there is a degree of risk—mostly to the investor—the investor can also benefit by hedging against market fluctuations, acquiring a newly built property with a new lease, and securing an investment in a supply-constrained market. We are currently transacting pre-sales with a higher frequency than ever before.

We also see investors moving on net-leased properties with short-term leases. Many of these properties have below-market rental rates, and/or strong store sales that enable the investor to take this kind of risk. Although a gamble, the cap rates for this product type are higher than that of properties with longer lease terms, and the payoff on increased rents with a new lease either from the current tenant or a new one is attractive to investors as upside potential.

When it comes to real estate investments in today's highly active market, accepting a certain level of risk is a given. However, with strategic and creative thinking, we are helping our clients achieve their goals and have played an integral role in their success.