Net lease properties are in an interesting position midway through 2018. While demand for the investment opportunities remains strong, the number of deals being struck hasn’t seen a dramatic increase. The capital is there—so why isn’t the transaction volume going up?
The issue is twofold. First, capital is plentiful. Property from other asset classes, such as multifamily, continues to sell as it achieves new occupancy lows and rent highs nationwide. Families that have held these assets for the long term are moving into the net lease market for fewer management responsibilities and lower risk. Many buyers enter the net lease market with 1031 tax exchanges to complete within a very tight timeline or they lose significant equity to capital gains taxation. Deals with both investment grade credit and long-term credit provide a very appealing combination for these buyers.
Second, mortgage rates have moved, which influences what cap rates buyers want to pay. Many net lease assets are new construction with new leases, and the developers built to a projected cap rate that they are eager to achieve. Many net lease owners are collecting solid rents and do not have an urgent timeline within which they must sell, so they can afford to wait on the right price. This has created a delta in buyer and seller expectations, slowing deal volume.
Asking cap rates have moved up slightly quarter over quarter, reflecting this delta. Retail has increased from 6 percent to 6.15 percent, industrial is up to 7.11 percent from 7.01 percent and medical is up from 6.67 percent to 6.75 percent. The market’s overall shift quarter over quarter was 8 to 10 basis points. Net lease transaction volume in 2017 was $54 billion, which was similar to 2016 according to CoStar.
Additionally, new SALT legislation is influencing owners of real estate in high tax states to move to low income states and municipalities. Net lease property owners are shifting their investments from New York, New Jersey, Connecticut, and California to Florida, Texas, Tennessee, and Nevada. That said, most net lease property with high credit tenants do not trade with great frequency but are instead held for the long term. The demand for high credit tenants keeps pressure on pricing in these states. Cities like Dallas and Tampa are benefiting from their current development booms. Nashville stands out as a “crane city” due to the sheer amount of real estate development underway.
Certain industries are growing within the net lease market faster than others. One particular area of growth is Urgent Care centers. Since these centers blend medical and retail property types, they have become a very popular investment option for backfilling recent retail vacancies. Industrial distribution centers and luxury retail storefronts are also among the most popular options, as they are resistant to e-commerce changes. Traditional office space, on the other hand, tends to be a less popular option, although many investors find this an area to get similar tenant credit profiles for higher returns.
To recap, the triple net lease market has remained strong throughout the first six months of 2018, which is consistent with long-term trends. We anticipate similar healthy activity for the remainder of 2018.
Camille Renshaw
Brokers + Engineers
261 Madison Ave
New York, NY 10016
646-701-4536
crenshaw@benetlease.com
Add Comment