TERTIARY MARKETS DRAW NET LEASE INVESTORS
LOS ANGELES—As product for sale in the net-lease asset class becomes ever scarcer and primary market yield decreases, secondary and tertiary markets are looking ever more appealing to investors, said speakers at RealShare Net Lease West yesterday. The conference, part of the RealShare Conference Series by GlobeSt.com’s parent company ALM Real Estate Media, held attendees rapt as experts discussed the state of the industry and made predictions regarding finance and investment and asset and portfolio management of net-lease properties.
Declining cap rates and scarcity of product, with increased liquidity to come, were the main topics during the Town Hall Power Panel, the first session of the event. Moderater Craig Tomlinson, CCIM, senior director at Stan Johnson Co., asked panelists to describe the state of the net-least market today. Gordon Whiting, managing director of Angelo, Gordon & Co., said his firm focuses on less-than-investment-grade tenants and has been very active this year. “It’s a sellers’ market, but it’s also a buyers’ market since interest rates are at all-time lows and buyers are able to get attractive financing.”
Ed Hanley, president of Hanley Investment Group, said his firm focuses on retail, and as an alternative to other risk-adjusted investments, net lease is a good option. Gino Sabatini, co-head of global investments for W. P. Carey, added that many buyers are being outbid on California properties; his firm “will do most of our investment outside of the US. We will spend about $700 million this year on US net-lease properties and more than $1 billion outside of the US. But we’re getting our fair share of deals done in this market.”
Rick Chichester, president and CEO of Faris Lee Investments, says his firm has about $350 million worth of product on the market, mostly single-tenant retail. “The demand is at an all-time high for us. There’s far more capital than product available, and there’s a lot of safety and predictability in net lease.” He predicted that the markets will continue to compress given these fundamentals and the fact that interest rates are so low.
But Andrew Winer, CIO of American Realty Capital Global, said it’s not about interest rates. “It’s all about liquidity. We are bullish even at low cap rates. If we don’t adapt, we will be beaten alive by the other players. Net lease is still a very good buy.”
Tomlinson showed some chart slides that revealed decreasing cap rates in the net lease space and crunched Real Capital Analytics data that showed most people in the industry think scarcity of product will have the biggest impact on net-lease sales; six years ago, the main factor was interest rates. Regarding whether the definition of quality product is changing, he asked the panel, “Have we moved the fairway?”
Sabatini said his firm got creative and purchased chicken farms to lease back to the tenant, while Whiting said his firm tends “to have lesser-quality real estate assets. Most of what we do is provide industrial stuff, which can be kind of ratty. We’re not afraid to go into the secondary and tertiary markets.” He added that the inflow of equity capital is a main driver of deals.
Chichester pointed out that interest rates will stay low not because of quantitative easing, but because of the fact that they can’t be changed too much given the state of the economy. “There’s been a dramatic increase of capital and equity into the market, although the hedge funds haven’t done well.”
Panelists also discussed the fact that cap-rate spread between investment-grade and sub-investment-grade assets have been relatively low, making higher-grade assets even more attractive. “The lines are blurring” between the two quality lines, said Hanley.
The structure of the lease is extremely important in net lease, panelists agreed. “Value is given up when the lease isn’t structured in a certain way,” said Whiting, and Chichester said investment is chasing yields, and investors are moving from product type to product type.
Tomlinson asked the panelists if this year has been a better one for the industry than last year. “The trajectory has a while to play out, but the direction we’re headed is up,” said Winer. Chichester added, “The brokerage community is as active as ever” and pointed out that “you have to underwrite both the lease terms and the tenant.”
Hanley commented that in the coastal communities of California, rental rates have almost doubled, but supply constraints add to price appreciation.