NEW YORK CITY—Demand for net lease investments is not only strong, it shows no sign of weakening, according to investors in the space who will speak on the state of the capital markets at RealShare Net Lease, taking place here later this week.
“We have a pretty significant imbalance of supply and demand,” notes W. Kyle Gore, managing director & principal, CGA Capital Corp. “Demand from debt and equity investors for credit leased back transactions—particularly where the credit is investment grade or higher—far exceeds the supply.”
That imbalance, and low interest rates, he adds, “have conspired to create a frenzy for great deals and to create demand for deals that in the past would have been marginal.”
Gore is seeing investors lower yield requirements or even “start giving up structure requirements. For example, net lease REITS are accepting shorter base lease terms than what the market demanded historically, exposing their investors to more residual value risk and more lease renewal risk than the net lease market had accepted in the past.”
And low interest rates are likely to stick around for a while, notes Barclay Jones III, EVP of investments, iStar Financial. “Right now the Fed is sitting with a pile of paper of all shapes and forms because it bought all sorts of things with every QE program. Any bond holder with a pile of paper doesn't want interest rates to go up so you have to believe the Fed is cautious about raising interest rates.”
While that's attractive to many investors, every positive trend has a flip side. “Low interest rates have an impact on stuff you own because return expectations have to be adjusted to take into account the new realities.”
Another trend of note, says Jones, seems to point up the lessons learned from the recession. “The market is still very cautious on credit worthiness so investors are aggressive on investment grade product and less aggress on lower credit [inventory].”
Other market participants point to additional trends unique to the current market.
“Net lease has become a global business, with US investors looking at Europe and global investors looking at properties in the US,” notes Kenneth Zakin, senior managing director of capital markets, Newmark Grubb Knight Frank. “Cap rates for investment grade credits are typically 50-100 bps higher than we might find for an equivalent credit in the US.”
Says Ralph Cram, president & manager, Envoy Net Lease Partners, “Net lease properties between $1 million and $5 million with highly recognized tenant names are the most popular; they appeal to all buyer groups. The low price points allow small investors to purchase them with or without leverage and portfolios of small net lease properties give the large buyer, such as REITS and large Institutional buyers, credit and location diversification. Mortgage debt is more plentiful for these properties as well.”
The least popular property types, he asserts, “Are specialty use properties with less than five years remaining on their lease term, especially if the unit is a poor performer or the rent is above market.”
Still, the market is rife with opportunity, Cram contends. “We are seeing leasing activity for both existing single tenant buildings and ground up development increasing. Also, the recent increase in retail tenant closures gives developers the opportunity to purchase vacant buildings and re-purpose or demolish them for tenants wanting to enter land constrained markets. We see this type of activity occurring especially on the East Coast and infill neighborhoods.”
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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.
