Berres: Contrary to office and retail pricing dynamics, investor appetite for net lease industrial properties is expanding rapidly. Pricing remains competitive for opportunities that feature four or five of the key investment values: long-term leases, investment-grade tenancies, strong rent growth, mission critical location and location in a primary market. Accordingly, cap rates are compressing across all market types, notably Los Angeles, down an average of 45 basis points year-over-year. This momentum will be sustained with a large pipeline of new deliveries coming to market over the next several years. Some investors are becoming timid toward opportunities featuring consumer-durables-tenanted retailers with strong exposure to the e-commerce effect. Consequently, cap rates have finally begun to soften for these transactions, up 10 basis points year-over-year. A modest compression remains for service-oriented retailers, down an average of 30 basis points, as capital demand for this product increases given the stability these retailers have historically demonstrated through cycles.

GlobeSt.com: Why have investors become more selective?

Berres: Retail buyers must be strategic more now than ever. For example, investors are finding opportunity in consumer-durable-tenanted retail assets (in which cap rates are softening), and seeking opportunities with below-market rents or with lease structures featuring long termination options with strong residual value. This type of strategy is allowing funds to grow and meet their performance goals in a competitively priced landscape. Through the last few quarters, funds with growth pressures have eagerly deployed capital in the net lease market, with some becoming increasingly flexible in their risk requirements in return for accretive yields. Some office and industrial buyers are now sacrificing one to three of the key investment values such as a short-term lease to an A+ rated tenant within a mission critical location. Nonetheless, as we continue to see net lease buyers playing more defense with risk mitigation, there is an increased bidder pool environment on core assets offering long term net leases with a strong credit story and mission critical component. On the contrary, without these factors, the buyer pools have continued to thin out significantly throughout the year.

GlobeSt.com: Are investors leaving the L.A. market to look for opportunities in other geographies? If so, where are they going and what are the benefits?

Berres: There will always remain a strong appetite for gateway markets such as Los Angeles for net lease opportunities. However, the expanding buyer pool, notably from foreign buyers is putting pressure on the competitiveness of domestic institutional funds. This, in turn, is applying further pressure on traditional net lease buyers such as 1031 exchange, family office, private firms and REITs. The widespread demand for net lease assets is leaving many buyers searching for risk-adjusted yields deeper into the markets. Throughout 2016, there was a large shift in activity from primary markets into secondary such as Salt Lake City and Denver, to name a few. The jump into tertiary markets this year is quite significant, with tertiary sales volumes up 20.5 percent year over year. Accordingly, primary and secondary market volumes are down 1.1 and 14.2 percent, respectively, as a result of current pricing in these markets. Looking at market migration, we see that all buyer types are keen on a shift in market focus for the right risk adjusted yields.

GlobeSt.com: What is your net lease outlook for Los Angeles next year, and what will be the challenges for investors in this niche as we move forward in the cycle?

Berres: There are many very sophisticated net lease investors questioning if the market cycle is coming to an end or if the momentum will remain for an extended cycle. Despite concerns of the increase in interest rates, tax reform uncertainties and speculation on impending FASB accounting changes, market activity provides a clearer perspective on what will drive activity over the next year 12 which is capital demand. The steady sales and healthy pipelines within an expanding buyer pool are expected to continue over the next 12 to 18 months given net lease's bond-like returns and favorable long term performance. Los Angeles will continue to remain high on investor's radar for markets to secure these long-term investments given its strong real estate fundamentals and high barrier to entry. Absent a major economic event, we continue to remain bullish on the net lease sector and cautious optimism remains the norm.