Tuesday, June 30, 2009

Where is the Market Today?

There is no doubt that we have seen drastic adjustments in the net lease market. Not only from the financial and economic perspectives, but from a psychological perspective as well. Of course there have been quantifiable increases in cap rates, interest rates and internal rates of return, but the perception of today's market is probably the most interesting intangible investment factor.

As the President and CEO of a net lease brokerage firm, I have the privilege of working with professionals from a multitude of disciplines within commercial real estate. We hear market perspective from attorneys to engineers, developers to sellers, REITs to investors and everything in between. What we are hearing is everyone wants more for less. That doesn’t mean that they are getting it, but at least they are saying that they want it.

Investors want better credit, longer leases, the best real estate and an absolute triple net lease. What may be forgotten is that net lease investments offer something that other real estate doesn’t; the opportunity to underwrite the known investment potential from day one. There is no other type of commercial real estate that will allow an investor to know exactly what their income will be from the day they buy the asset until the day they sell the asset. The perception is that they should be getting a much better return than they are being offered. In some cases, that is highly warranted. But in others, it may not be.

We have to remember that net lease investments are still a long term income stream backed by real estate. When an investor and I discuss the current market statistics, I always remind them that yes, they will be getting a better return than what was offered in the last 3-4 years, but they may not be getting the deal of a lifetime. Net lease investments are still garnering single digit cap rates for long term, credit tenant investments. There was a day when today's investments were pricing out at 10%+ CAP rates, but not today.

Today, we see genuine interest in the net lease investment asset class because of its passive nature and higher returns than money markets, cd's, US treasuries, and the like. So while the perception of the market is "buy now, because it may not be this good again," I offer the following advice. The net lease market will ebb and flow with the rest of the market, but stability of the assets will typically remain somewhat constant. Net leases are almost an anomaly in that respect. Perception is reality, but net lease investments are real.

1 comment:

  1. Your comments, as usual, are very cogent. Our own national net lease practice from the West Coast mirrors your view. We are finding that the ability for investors to secure a stable, predictable income streams from an investment grade real estate investment can serve as an effective inflation hedge and diversification which still has a resonance with investors from around the world.
    The deal flow which, as you know only too well, was generated, in part, in the recent past by 1031 Trade Buyers who had an imperative to defer taxable gains combined with historically low interest rates and underwriting all conspired to produce a frothy net lease market.
    Today, the language of a risk-adjusted returns has a new signficance since risk and revised valuation are now in the forefront of a buyers acqusition criteria.
    In a recent "non-transaction", we were coordinating with your colleague, David Sobelman, on behalf a Trade Buyer who was focused of deferring a $2.6mm tax liability. In the last 30 days of his ID period, cap rates did, in fact, move up 35-50 bps; but the debt rates went up 85 bps. He determined that it was taking on more risk to complete his proposed trade than paying his taxes.
    This would not have happened two short years ago. So, the market psychology is leaning toward risk-averse investments which highly recommend net lease assets, as you suggest. Our ability to collaborate effectively and provide accurate market intelligence allows the objectives of both Buyers and Sellers, alike, to be achieved in a timely manner.