THE NNN MARKET

THE NNN MARKET

By: Tom Georges, Associate Director/Investment Sales, The Stan Johnson Company

Tom Georges was interviewed by Jaime Lacky of Northeast Real Estate Business regarding the state of the net lease market.

Single-tenant investment sales volumes have risen steadily since the end of the Great Recession, with 2015 posting a total of $19.3 billion in the retail sector in the U.S., $21.7 billion in office properties and $22 billion in industrial properties, according to a report by Stan Johnson Company. Northeast Real Estate Business recently spoke with Tom Georges, associate director of Investment Sales with Stan Johnson Company’s New York City office, for insight into the net lease market.

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NET LEASE CAP RATES SET RECORDS

NET LEASE CAP RATES SET RECORDS

Cap rates for single-tenant retail properties hit an all-time low in the first quarter as buyers chase these net lease assets.

Net lease retail investment is hitting new lows, but that’s a sign of its high esteem among investors. During the first quarter, median cap rates for single-tenant retail properties dropped to 6.18 percent, setting a record, according to a report published in April by The Boulder Group. That represents a decline of 7 basis points from the previous quarter and a 22-basis-point decline year over year.
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A CLOSER LOOK AT NET LEASE INVESTMENT

A CLOSER LOOK AT NET LEASE INVESTMENT

By Natalie Dolce

LOS ANGELES—If a good deal comes along with good yield and credits that you can get comfortable with, whether the deal is in a secondary or tertiary market isn’t the main focus. That was according to panelists on the “Investment and Transaction Outlook panel at RealShare Net Lease West on Thursday.

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Net Lease Cap Rates May Increase As Pressure Softens

Net Lease Cap Rates May Increase As Pressure Softens

According to Dominic Cerminara, of Kingsbarn Realty Capital, cap rates in the net lease sector have seen immense pressure, thanks to the extreme demand and competition for product, but that may be changing.

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Expect cap rate spreads to narrow

Two years ago, the real estate investment market was completely shut down. Nobody expected to see pre-recessionary cap rates again for many years. Over the next year, capital started to flow into the sector, hoping to capitalize on the market’s distress. However, the anticipated level of distress never materialized and investors needed to adjust their return expectations. As financing became available, underwriting standards loosened, and interest rates came down, more capital flowed into the real estate sector. The fundamentals side of the market, however, has been moving considerably slower, focusing investors and lenders on Class A product in Class A locations. The accompanying chart segments markets into three tiers: Tier 1 consists of the nation’s top five investment markets, Los Angeles, Chicago, New Jersey, Atlanta and Dallas; Tier 2 includes the next 11, mostly primary markets, such as Houston, Miami and Seattle; Tier 3 covers 15 secondary markets, such as Denver, Minneapolis and Ohio. While cap rates in Tier 1 markets are already back to their pre-recessionary levels, Tier 2 markets still have about 50 basis points to decline, and Tier 3 markets remain 100 to 150 basis points above their peaks.

The two primary drivers of this aggressive decline in cap rates are the low cost of capital and rent growth expectations. Today, a private REIT that is paying a 6.5-percent dividend yield can offer sub 6-percent cap rates and still cover its cost of capital. Stronger rent growth that will follow the unprecedented declines of the last two years can elevate 6-percent cap rates to double-digit unleveraged IRRs. However, cap rates in Tier 1 markets are approaching the floor and the increasing spread over Tier 2 and 3 markets is becoming very attractive. Expect this spread to narrow by the end of 2011.

Source: RCA, Grubb & Ellis

Ryan Severino: Office Cap Rates Down to 7.4% In Limited Transaction Market

Ryan Severino: Office Cap Rates Down to 7.4% In Limited Transaction Market

Ryan Severino: Office Cap Rates Down to 7.4% In Limited Transaction Market.

(The following is adapted from from a portion of Reis’s latest quarterly Capital Markets Briefing, originally delivered by Ryan Severino, PhD, on 8/25/2010.)

national-office-cap-rate-trends1-300x225

As the slide above illustrates, the mean cap rate for office properties decreased dramatically in the second quarter, from 8.2% in the first quarter to 7.4% in the second quarter.  Mean office cap rates had been steadily increasing since the third quarter of 2008, before fluctuating a bit throughout 2009. Much like apartment, the limited and selective transaction market causes quarterly changes in mean cap rates to be somewhat unpredictable and volatile.  This quarter’s 80 basis point decline, while not unwelcome, epitomizes this ongoing phenomenon. The average price per square foot and the mean sales price increased also increased versus last quarter, even though the number of buildings transacted declined. Therefore, we can conclude that this quarter’s rather steep decline in cap rates is likely due to an increase in the quality of buildings that traded this quarter versus the quality of those traded in recent quarters past. Sentiment in the marketplace is improving, but it is important to understand that a changing mix of buildings from quarter to quarter can have a significant impact on the mean cap rate and we should not confuse this with a change in sentiment in the market.

For better guidance, it is instructive to examine the trend in the 12-month rolling cap rate, which shows that cap rates for the office market might–emphasis on might–have peaked last quarter. It is still too early to tell for certain if we have reached the peak in cap rates for office, especially because of the effect that this quarter’s decline in cap rates is having on the 12-month rolling rate. Nonetheless, this quarter’s decline in the 12-month rolling cap rate is the first time that we have observed a decline in almost two years, since the third quarter of 2008. Although it only represents a slight decline, it is the first indication of stabilization in pricing that we have observed in the office transaction market. The trajectory of cap rates for the remainder of the year will largely depend upon the trend in fundamentals and their impact on sentiment in the market throughout the latter half of the year. Office fundamentals have not yet begun to improve, but if they do during the remainder of the year that could provide support and enthusiasm for office transactions.