NEW YORK CITY—Net lease retail is hot, and it's in large part due to 1031 exchanges. So says Scott Scurich, associate director for Stan Johnson Co. in New York. GlobeSt.com met EXCLUSIVELY with Scurich as part of our coverage surrounding the ICSC New York National Deal Making conference to get a better sense of what is driving net lease retail.
GlobeSt.com:How would you describe the state of the net lease retail market on the East Coast and throughout the U.S.?
Scott Scurich: The secret has long been revealed that the net lease market is on fire throughout the entire country, especially on the East Coast. The strength of the overall real estate market is leading to a record level of 1031 exchangers, who have a strong desire to defer their capital gains tax into the net lease sector. The exceptionally high demand, combined with the low inventory of available product and low interest rates, continue to drive cap rates to historic levels.
GlobeSt.com: How is the state of new development impacting the sale of net lease retail properties?
Scurich: Developers struggle to keep pace with investor demand for new net lease assets with long-term leases, but the real beneficiaries of this market are the owners of assets with shorter-term leases. Sellers of shorter-term deals are drafting behind the benchmark cap rates achieved with new construction as investors are willing to take on additional term risk to earn a more compelling yield. This shift in investor appetite is adding significant liquidity to a sub-sector that previously had a more limited pool of investors.
GlobeSt.com: What is key for an investor to be selected and close on a net lease retail property in today's environment?
Scurich: The exchange community has really been dominant on the retail front and the increase in exchange activity is driving cap rates to thresholds that institutional buyers are having a tough time competing with. As a result, sellers are in the position to choose between either the premium pricing with an exchanger or the surety of closing with a proven buyer. As an investor, it is important to leverage your strengths with sellers. Non-refundable earnest money, shorter due-diligence and closing timelines, as well as a compelling buyer story can all help to differentiate an investor from the competition.
GlobeSt.com: What advice do you have for investors of net lease retail properties as we head into 2015?
Scurich: Understand market conditions and act accordingly. Investors have to be cognizant that this is a seller's market with most assets generating multiple competitive offers from qualified buyers. Investors have to be prepared to move quickly and aggressively on the assets they wish to acquire.
GlobeSt.com: What are your expectations for 2015 net lease market?
Scurich: Interest rate movement is inevitable, but I believe transaction momentum from 2014 will continue into 2015 as the supply and demand imbalance for net lease product will still be a major factor. The trend of new historically low cap rates every other day will likely come to a slow down, but drastic valuation changes are unlikely.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
