"We've had an impressive economic runway for a number of years so there are a lot of private investors that have more discretionary capital," Sands said. "And, as a result, there's a lot of private wealth acquiring STNL assets right now."
SANTA MONICA, CA—An economic expansion approaching the longest in history means greater prosperity, of course, but it also means more investors have a ticket to the commercial real estate game, especially one like the single-tenant net lease (STNL) sector that offers many benefits and relatively easy entry. GlobeSt.com spoke to Chris Sands, founder & CEO of Sands Investment Group, a national real estate brokerage firm specializing in net lease properties, to discuss private net lease investors, deal volume and the 1031 exchange driver.
"We've had an impressive economic runway for a number of years so there are a lot of private investors that have more discretionary capital," Sands said. "And, as a result, there's a lot of private wealth acquiring STNL assets right now."
Investors flock to the many STNL investment product advantages: low barrier to entry, stable cash flow, ease of management and both appreciation and depreciation. Single tenant property sales jumped 11.4 percent in 2018 to $65.4 billion, according to Real Capital Analytics.
A high velocity of private STNL investment transactions are occurring in the sub-$5 million range and even more at $2.5 million and smaller, according to Sands. Additionally, historically low interest rates have helped to fuel the chase for properties at all price points.
"Compared to volatility in the stock market and the bond market still offering a very low rate of return, the single tenant net lease sector offers a very consistent yield," Sands said. "There's a multifaceted benefit and place for the capital investors have amassed over the last few years."
Taking a more value-add, opportunistic approach, the STNL syndicators and other private professional investors aim for the well-located short-term deals with below market rents where there's an opportunity to do a blend and extend deal or renegotiate a new lease when the time comes. On the other side, passive investors are typically focused on getting a solid rate of return, which means a greater focus on lease term and the credit of this guarantor behind the lease.
"If it's got a 15-year lease with a corporate guarantor or a strong credit franchise, you'll find some smaller or less-seasoned investors don't mind if it's in a tertiary market because they know they have credit and have some term left on the lease," Sands said.
The new tax law did a lot, but what it didn't do could mean more to STNL investors. It didn't eliminate the 1031 exchange, which Sands calls one of the major drivers of the net lease sector. His company did more than 400 transactions last year, around 70 percent of which were 1031 exchanges.
"You have a tremendous amount of capital trying to get into the real estate sector," Sands said. "because of that, it becomes a seller's market. That environment then creates a large 1031 exchange pool. That pool got bigger & bigger and what we've really seen over the last several years is a tsunami of 1031 exchange buyers coming through."
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Brian A. Lee
Brian A. Lee is an Atlanta-based freelance writer and former editor of Western Real Estate Business magazine. The Wake Forest and University of Georgia graduate has covered commercial real estate since 2000.
