More conservative investments, including
net-leased properties with strong tenants,
are being targeted by Grubb & Ellis Realty
Investors LLC’s TIC program. Its deals in the
latter part of 2008 included Oak Park Office
Center III (opposite page), a 151,000-square-
foot office building in Houston triple-net
leased to Jacobs Engineering Group
Inc., and 1650 Sunflower (this page), a
109,000-square-foot sorting and distribu-
tion center in Costa Mesa, CA fully leased to
Federal Express Corp.
As the overall real estate market rises and falls, so too does 1031
exchange volume. And as with the greater market, any significant
comeback in 1031 deal velocity could be another year away.
has permeated the market. “There’s a lot of anticipation that
the market is going to soften further,” he says. “Last year and
the first half of ’09 will probably be the worst period we’ve
seen in a generation. We’re going to go through a tsunami of
foreclosed commercial real estate.”
Throughout 2008, many net lease market participants estimated the decline in transaction volume to be roughly 50% to
70%. In the third quarter, Northbrook, IL-based Boulder Net
Lease Funds LLC reported closed net lease transactions were
down 60% year-over-year. While not all net lease property deals
are part of 1031 exchanges, it is the kind of property that individual exchange investors have traditionally sought, so the
numbers are indicative of the recent decline in overall exchange
activity.
The relatively newer phenomenon of tenant-in-common
transactions, a market fueled almost entirely by 1031-exchange
investors, has also seen a significant deterioration in transaction volume. Salt Lake City-based Omni Real Estate Services
LLC estimates that when 2008 numbers are fully tallied,
equity raised in closed securitized TIC transactions will total
roughly $1.35 billion. That will result in a more than 50%
decline from the $2.7 billion in equity raised in 2007, which
itself was a substantial drop from 2006, a record year that saw
$3.7 billion in equity commitments.
“We all know that 1031 is a pure derivative of overall real
estate market conditions,” notes Jeffrey Hanson, president
and chief investment officer of Grubb & Ellis Realty Investors
LLC, which both sponsors TIC investments and, through its
private client management platform, works with 1031-exchange
buyers of net-leased and multi-tenant properties. “If sales
velocity is down nationally, so will the amount of equity
raised. We are in unprecedented times in terms of volatility.”
Global economic conditions and the availability of debt for
real estate transactions are key components that were “deeply
unpredictable” in the final weeks of December but, ultimately,
will determine what kind of year the investment market has in
2009, he maintains. Hanson believes things will get worse
before they get better, and it will be at least 2010 before the
market sees a real rebound.
Indeed, though many like to hold on to the hope that the new
year and a new administration in the White House will bring
about positive changes in the overall economy and the capital
and real estate markets, no one appears eager to wager on it.
Volumes, at least through the beginning of this year, will be
similar to those of 2008, says Ken Hedrick, a senior associate
with Tulsa, OK-based net lease brokerage specialist Stan
Johnson Co. “There’s a chance it could pick up as the year
progresses,” he adds.
Whether 1031 exchange activity—and net lease property
deals in general—will begin to increase will depend on several
factors, he notes. One is a narrowing of the bid-ask spread on
property prices, which began to take place late last year but
still has a way to go. Another key factor, he notes, will be
whether lenders will loosen their purse strings in terms of
providing debt capital.
Debt availability will likewise be a significant determining
factor in what kind of year the TIC market has in 2009. Omni
Brokerage Inc. chief executive officer Greg Paul expects the
debt market will play a large role in how much equity is raised
by TICs. “If credit loosens up, it could be $1 billion or more,”
