By Natalie Dolce
LOS ANGELES—Why are sale-leasebacks and build-to-suit deals so popular? According to Andrew White, CCIM, managing director of the western region at Gladstone Commercial REIT, and a moderator at the recent RealShare Net Lease Westconference here, the answer is because “Cap rate spread to treasury is still high.”
The “Opportunities” panel discussed the opportunities in sale-leasebacks and the advantages of build-to-suit developments. Panelist Peter Deltondo, director of Marcus & Millichap Net Leased Retail Group, said that the most aggressive capital he is seeing in this space is from the 1031 buyers. “Most of them are coming out of the apartment sector and they are paying the most aggressive cap rates.”
In addition to the 1031 capital, there is a lot of demand for Chinese investors to come into the states, he said. “They have already started on the residential side. They get the money out of China and diversify.”
The smaller investor, he added, is willing to pay a lower cap rate, and is also an aggressive buyer right now. “The demand has grown year over year, month over month and I don’t see a let up going forward.”
Joseph Yiu, CIO and managing principal of ElmTree Funds, said that there is an expected 390 million square feet of industrial build-to-suits in line and that is expected to grow over the next three years.
When asked about secondary markets, Yiu likes them. “That is where we play… The yields are a little bit wider.”
With respect to underwriting, a lot of what Mike Fitzgerald, SVP of retail sale-leaseback at VEREIT Inc., is doing on the public side is constantly managing the concentration. “There is a preference to be with large familiar names on the retail side but there is room for these interesting sale-leaseback deals that are looking to monetize newly acquired companies that have real estate.”
Panelist Howard Sands, founding principal and managing director of Corporate Partners Capital Group LLC, looks at the quality of the real estate, the quality of the lease and the quality of the tenant’s credit. “It is a triangle with one not more important than the other. When we look at a portfolio, we don’t have an opportunity to cherry pick. When you are looking at a portfolio deal that was packaged, and you are bidding on it, you are trying to make the bulk sale easier for the seller than it would otherwise be on a one-off basis. We know because we frequently resale assets. Certainty of performance is a key factor.”
What asked what inning we are in pertaining to the sale leaseback/build-to-suit market, Ralph Cram, president and manager of Envoy Net Lease Partners, said that it is really sector driven. For retail, we are late in the cycle and that is because a lot of retailers don’t know what their floor plan will be, he said. “It is food, mattresses and dollar stores … that is who is build-to-suit today.”
But the best long-term investment, according to Cram, is urban 30,000-square-foot to 50,000-square-foot high cube space is the best long term investment if you are putting family trust in.” And the office sector, he added, “doesn’t have anything happening besides the tech space.”
One thing Deltondo pointed out that was interesting to note, is taking properties to market earlier than he used to in order to lock in buyers.
And the identity of those buyers, Fitzgerald explained, is sometimes unknown. “I don’t think we fully understand who we are competing with sometimes. There are so many buyers out there.”