Wednesday, August 26, 2009

Land Investment, Present and Future, a Discussion with Rich Samit.

Net Lease Insider sat down with Rich Samit, Founder and CEO of Fraser Forbes Real Estate Services, the leading firm in the Mid- Atlantic region handling land sales, financing, management and advisory services. Net Lease insider sought to discuss the outlook of land and its implications on the net lease market.

The discussion centered around five questions and produced some very interesting results:

Q1. Why do so many land owners consider a net lease asset as a replacement property?

A1. Like land, a net lease investment is “passive”, requiring no action on the owner’s part to maintain. For owners of land, who are not accustomed to taking an active role in property management, a net lease ensures their management responsibilities remain the same. This also translates into greater flexibility relating to location. As management never comes into play with a passive investment, proximity is of no consequence, allowing for wide range of geographical possibilities.

Furthermore, a transfer from land to a net lease is also a transfer from a non-depreciable asset with no income (land) to a depreciable asset with income (net lease). The advantages here are clear; the net lease allows for use of the depreciation tax shield while collecting income for the owner, making it an attractive option.

Q2. As a follow-up question, do most investors selling land consider doing a 1031 exchange?

A2. Normally a 1031 exchange would come into play because owners of land generally see appreciation in their asset and would rather defer it than pay taxes on it. However, land purchases in the last few years were subject to the bubble of price inflation and today are not faring well. If you bought land from 2004-07, you are most likely flat or underwater. Because no gain is observed, today most investors have no need of the 1031.

Q3. Have you started to see an increased number of 1033/eminent domain transactions due to increased government infrastructure appropriation?

A3. In the last 12 + months there has been a 20%-30% increase in the number of 1033’s seen. There are many government projects underway such as Metro’s expansion to Dulles Airport, the hot lanes in Maryland and Virginia, the ICC and purple line in Maryland, and other various state needs on both sides of the Potomac river. As a result, the construction of such facilities has forced people into 1033’s through eminent domain. Deals involved cover a wide range, going from $1 million to as much as $50 million in some cases and net lease investments have been one of the favored asset classes for reinvestment.

Q4. At what point in this cycle will investors start to recognize land as a very undervalued asset opportunity?

A4. The bottom seems behind us in terms of residential real estate. Many developers who haven’t been active in 3+ years are building up their land assets as that market begins to recover. The picture is less positive on the commercial real estate side. Prices continue to fall and until they hit bottom, investors are holding back.

Q5. What is the current state of land as an investment opportunity?

A5. The best opportunities today are large raw residential or mixed use land investments in the urban and suburban core. Though they require a large amount of capital to purchase and maintain, many deals can be purchased at discounted prices and will definitely see a high level of appreciation in the future. Also, any investment near new infrastructure developments such as mass transit systems and power life style centers has a lot of growth potential.

Wednesday, August 19, 2009

Medical Office Real Estate: A Net Lease on Life

While many real estate investments are loosing value, the medical office sector has shown remarkable resilience. According to a report from Marcus & Millichap Real Estate Investment Services, the segment is holding up much better than other property types and this trend projects to continue.

Currently the nation spends $2 trillion on health care annually, by 2013 that number is projected to grow to $3 trillion. In-fact, medical expenses have increased by an average of 7.7% over the past 10 years and now make up 17% of GDP. This exponential growth has been fueled by the large amount of baby-boomers who are steadily increasing in age and by 2013 the number of people over 55 will have increased by 20%. As more people advance in age, their medical expenses will rise correspondingly, fueling demand for the medical office segment.

Another driver of demand has been the shift from “an impatient to outpatient focus”. This has been caused by the steep rise in costs associated with hospital construction. A single hospital bed is now estimated to cost $1 million, driving many new hospitals to house around only 100 beds compared to older hospitals featuring close to 800. This decrease in supply, coupled with an increase in demand from an aging populace, has created a large need for medical office space.

These trends are reflected in the industry’s employment numbers. While the rate of job growth has decreased, job growth itself is still positive. 50,000 jobs have been added this year and another 200,000 are projected to be added by years end. By 2013, 2.4 millions jobs are projected to be added to the sector.

Despite these positive indicators, vacancy is projected to rise. This is due to the economic climate which is forcing many to abstain from health care expenditures they previously would have made. All told, vacancy is projected to increase by 100 bps this year, reaching 12.4% and rents will decrease by roughly 2.7%.

This increase in vacancy should be seen as a possible opportunity for those considering investment. Unlike other sectors, medical office real estate is virtually guaranteed to see a future rise in value as our population ages and health costs increase. Furthermore, if you couple a medical office investment with a net lease structure, you can create a passive investment that will see real growth in the future. This is perfect for someone who wishes to take a less active role in property management but still see his property value escalate. The combination of higher demand, less space and higher employment make medical office real estate an attractive net lease investment for the future.

Wednesday, August 12, 2009

Is Net Lease Back?

Last Thursday, Globe Street’s very own Michelle Napoli reported that Realty Income Corp, one of the larger players in the REIT market with a focus on net lease investments, has begun looking at acquisitions. Specifically, CEO Tom Lewis said:

“I know there will be some modest acquisitions in the third quarter, and I’ll define that as a trickle, and we’ll see where it goes from there.” He adds, “We are looking at transactions and buying again.”

This is highly significant information because, as Lewis states himself, “it’s been about 20 months since we put out an LOI on a property.”

The fact that Realty Income’s previously muted presence is coming to an end amongst a series of acquisitions could point to the long elusive light at the end of this recession wrought tunnel. At least, as far as the net lease market goes.

And who is the culprit for this recent spat of good news?

Why it’s those two eternal forces of capitalism, who until recently were not on speaking terms: Buyers and Sellers. The gap between them seems to be closing, especially in terms of seller expectations. Which are becoming, as Lewis notes, “more realistic.” This means that for those who have prudently stored capital, the time may be now to start buying. And in a market as tumultuous as this, net lease investments with their incumbent safety, may be the place to start investing.

Bolstering this perception is a recent upgrade by Friedman & Billings Ramsey Capital of Cap Lease Funding’s target, elevating it to $6.00 from the previous $4.00. This positive development for Cap Lease Funding, which specializes in Net Leases, could very well be indicative of the entire market. Taken together with Realty Income Corp’s new dalliances, we may be seeing the beginnings of a positive trend. So look out world, there may be sunny weather ahead.

Tuesday, August 4, 2009

How Much Longer Will The Recession Last?
The Results Are In

Posted below are the results from our poll given two weeks ago concerning the length of our present recession. The numbers leave us with two important things to take away:

1. Most respondents, 78%, trended towards the middle. In this case I’m defining the middle as “Less Than One Year”, “One Year” and “More Than One Year”. In other, less scientific words, 78% of respondents believe the recession will end in a year, give or take a few months.

2. In terms of the extremes “Its Already Over” and “More Than Two Years”, we see large disparity trending towards the latter. 17% of people answered “More than Two Years” compared to only 5% for “It’s Already Over”. This leaves one with the impression that more people tend to think extremely negative of our situation than positive.

When compared with results returned by other polls, such as “The Harris Poll” released on July 15th, we can see a correlation. 63% of their respondents answered between “Less than 6 months” and “Between 1 and 2 years”, which is roughly comparable to our middle range of 78% answering between “Less Than One Year” and “More Than One Year”. Though our results show a higher skew in that data range, both polls returned a majority in that area.

Of higher significance is the number of people whose predictions ranged beyond two years. In our poll that number was 17% but in the Harris poll, if their latter two categories of “In more than 2 years” and “I do not expect the recession to end in the foreseeable future” are coupled together, that number is 38%, more than twice as large. So while both polls show a skew to the extreme negative over positive, theirs is certainly higher pronounced.

Harris Poll: When Do You Expect The Recession to End?

All in all, both polls have more similarities than differences, with the clear results being most people think the recession will end in roughly a year and of those remaining, that the recession will last more than two years. The one difference is a more pronounced trend to the positive in our poll, implications being that GlobeSt readers are of the more upbeat variety.