NEW YORK CITY—The strong state of the economy—as well as that of the dollar compared to foreign currencies—is giving the net lease sector new appeal to a growing number of investors, according to commercial real estate professionals who will present a “State of the Industry” discussion at Real Share Net Lease, taking place here on April 16th.
“The economy is in a Goldilocks situation,” declares Paul McDowell, president of the office & industrial group at American Realty Capital Properties. “It's not too warm and it's not too hot; it's just right. So the next 12 to 24 months look good.”
“There's a lot of capital available in net lease,” adds Gordon Whiting, managing director, Angelo, Gordon & Co. “There's a lot of corporate ownership and with the thought of rising rates, we're going to see more companies do sale leasebacks so they want to do it while capitalization rates are still low.”
As a result, says Richard Ader, founder and managing director, US Realty Advisors, “The industry has been accepted by a larger pool of buyers, it's significantly bigger. Our weekly deal flow has increased by about 10%.”
Also, he adds, “Different foreign buyers have entered the market; we have noticed that there are more Asian buyers bidding on high credit transactions. We're seeing this because of pricing on deals among other factors. The product flow has increased too; corporations are more willing to enter into long-term leases of 10 years or more.”
For their part, US based investors also are looking abroad for net lease investments in light of market conditions. “More than half our volume last year was outside of US,” asserts Gino Sabatini, managing director, W. P. Carey. “We did a 20-year leaseback in Australia and a lot in Europe. Our borrowing costs are even lower overseas so that makes the lower cap rates there even more attractive than the low cap rates in the US.”
But domestic cap rates are low enough to lure investors to the states, notesMcDowell. “Cap rates have largely stopped compressing but they remain at historic lows alongside the 10-year treasury so spreads are very good.”
Still, a change in cap rates could be looming on the horizon, notes Whiting. “You'll see cap rates stabilized in the near term but trending up by year end due to the expected rise of interest rates.”
Fortunately, he adds, “There's always a lag between an increase in interest rates and cap rates rising.”
But in the most shocking statement of all, McDowell contends, “I'm not sure how relevant interest rates are to the net lease business. Cap rates are not as closely correlated as people like to think they are. The state of supply and demand is more of an issue.”
For the foreseeable future though, investors like the market. “Things will remain attractive in net lease,” says Sabatini. “Even if one or two companies reduce their appetite, others will step in.”
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Rayna Katz
Rayna Katz is a seasoned business journalist whose extensive experience includes coverage of the lodging sector, travel and the culinary space. She was most recently content director for a business-to-business publisher, overseeing four publications. While at Meeting News, a travel trade publication, she received a Best Reporting award for a story on meeting cancellations in New Orleans during Hurricane Katrina.
