Net-Lease Sector 'Red Hot'
Demand for net-leased properties – particularly retail – continues to surge, which is very bullish news for owners of retail properties in general.
With average retail cap-rates compressing to 6.25% for new construction, NNN leased properties, it is only a matter of time now until the cap rates on well positioned neighborhood centers begin to compress as well – particularly those with strong tenants and a solid leasing history.
From the article:
Investor demand for net-lease properties, those single-tenant assets often perceived as boring but safe alternatives to riskier real estate investments, is spiking to record levels as more confident investors continue to snap up convenience and drug stores, restaurants and other single-tenant retail establishments.
"The net lease market has been on fire," says JLL Managing Director Guy Ponticiello, who leads the company's corporate finance and net lease national practice group. "Net lease sales activity is expected to be north of $55 billion this year compared with $40 billion in 2007. There's a tremendous amount of capital earmarked for the sector."
Demand is spread across all types of single-tenant assets. Asking capitalization rates fell to historic lows for both net-leased office (7.25%) and retail (6.25%) in the third quarter, according to a new report by The Boulder Group. Tightening supply caused cap rates for newly delivered property occupied by 7-Eleven, Bank of America and Family Dollar compressed by between 25 and 65 basis points, compared to 15 basis points on sales of all net-lease assets, noted Boulder Group President Randy Blankstein.
"Properties in the greatest demand continue to be new construction with long term leases with investment grade tenants," Blankstein said. "Despite a slight rise, there is a lack of new construction properties with long-term leases as the development pipeline has slowed compared to the first half of 2015."
While the potential effect of the wage hikes on the bottom lines of retailers' bottom line is still unknown, as a whole, retailer demand is expected to remain well ahead of supply increases this year, Marcus & Millichap said. Net absorption will nearly double planned completions, causing asking rents to climb in the low single digits.
While there's a huge spread between cap rates of high- and lower-quality properties, institutional investors, pension funds and both publicly traded and Nontraded REITs have moved into the space with a vengeance, Ponticiello said.
"Where you do have assets with longevity of lease terms, cash flow security and rent escalation to comfortably hedge against future interest rate movements or inflation, those deals are experiencing unbelievably low cap rates," he said. "We still see 15-year deals with decent bone structures, with newer buildings in prime markets trading in the low 5% range."