NEW YORK CITY—"Easy to manage and maintain remotely." That's one of the reasons Matthew Mousavi, senior managing director at Faris Lee Investments, gives for the continued demand in NNN retail investments. GlobeSt.com met up with Mousavi to get his read on the sector in this EXCLUSIVE interview for ICSC New York National Deal Making.
GlobeSt.com: What is the current national landscape like for retail property, and how has that changed over the past couple of years?
Matthew Mousavi: The demand for income-producing retail assets remains robust. Debt and equity seeking retail assets is abundant, and alternatives in equities, bonds, securities and other investments lack the tangible security of a bricks and mortar asset. Volatility abroad, particularly in Europe and China, has caused offshore capital to increase investment allocations to the U.S. real estate market. Retail, that is high profile, well-located, and occupied by internationally recognized credit tenants, has captured much of the inflow of this offshore capital. This demand, coupled with historically low interest rates, has pushed pricing to the record levels we see today, and has increased transactional volume across all retail sectors, in virtually all markets.
The most dramatic shift has been the ability of private and institutional capital to go from market to market, state to state, within retail. Retail, in particular, lends itself to national, cross-border investing. I have been actively placing California-based capital into out-of-state markets throughout the country on behalf of private and institutional clients, with transactions in 42 states over the past 12 months. This is a result of investors widening their criteria, particularly in NNN leased assets, to out-of-state markets. Well-located retail in California, for example, has similar characteristics to its counterparts in Texas, Florida, or other markets throughout the country. Buyers are branching out to find more attractive yields, and to find product. The passive ownership profile of NNN leased assets makes them easy to manage and maintain remotely.
GlobeSt.com: What properties are still hotly contested, why, and who is bidding?
Mousavi: Net leased assets continue to be hotly contested. The prospect of passive, annuity-type income, and leases with limited to no landlord responsibilities backed by credit tenants, have attracted a considerable amount of capital nationally and internationally.
Within net leased retail, nationally recognized and investment-grade tenants are sought after, as well as properties that feature leases with 10 to 15 years or more of term, that are absolute net with no landlord responsibilities, and with those that feature rental increases throughout the initial term. Top 50 MSAs are also preferred, with strong demographic fundamentals, as well as newly constructed properties which are more challenging to come by.
Bidders include private capital, mainly comprised of 1031 exchange investors; retirement-driven investors looking for annuity-type income streams; and public and private institutional investors, including public and private REITs, funds, pension funds and insurance companies.
GlobeSt.com: How do you advise clients on a property pricing strategy?
Mousavi: There has been a notable increase in supply of retail net leased product on the market. As demand has increased, yields have compressed, and supply of newly constructed properties remains limited, thereby compressing yields further. Thus, owners of net leased retail properties have sought to capitalize on this demand and take advantage of the current pricing levels. More supply has come to market, although much of it is lower quality.
With cap rates compressed, anticipation of higher interest rates for 2016 and beyond, and an increasing amount of supply coming to market, pricing is critical. Our pricing strategy focuses on current inventory alternatives to a particular asset we're evaluating, and thorough analysis of every attribute of a particular asset. It is imperative to be priced appropriately, and to not be overly aggressive. For example, discount dollar store product, most of which feature similar leases, similar credits, in similar markets, are more susceptible to competing inventory pricing than unique assets with little to no competing inventory.
GlobeSt.com: What else do you think we should know about property investment in this environment?
Mousavi: It is important for investors to maintain investment discipline in a heightened market, and to rely on fundamental real estate principles when evaluating retail / NNN opportunities. Market rents, demographic forces, future outlook of the tenant (particularly the tenant's industry outlook in relation to e-commerce), timeline for the investment, cost of capital and other factors should all be taken into consideration when investing in today's market.
Visit Faris Lee Investments at ICSC New York National Deal Making, booth #1215.
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Geoffery Metz
Geoffery Metz is the content manager for ALM's GlobeSt.com, Credit Union Times and Treasury & Risk. Before joining ALM, he spent several years overseeing the newsroom at the financial wire service Business Wire, with special focus on multimedia presentation for the web.
