tunistic buyers looking for IRRs in the 20s or 30s should probably search elsewhere. “They’re not looking for a pop; they’re looking for a nice, stable investment,” Sughrue says of net lease investors. These types of deals are particularly attractive for a pension fund or insurance fund that has a certain allocation for real estate, he says: It’s a good place to park your allocation.” Ader notes that “a lot of institutional investors are looking much more closely at net lease. It provides significant cur- rent cash flow as well as less risk for infla- tion, because the first item that usually increases in an inflationary environment
point spreads from one deal to
another.”
Fox also sees cap rates varying on a
case-by-case basis, rather than from one
sector to another. “All of our deals are
dependent on a number of factors: the
tenant’s rank, the quality of the real
estate and the length of the term,” he
says. “Depending on where you are in
those three areas,” cap rates can occur
within “a fairly broad range,” he adds.
NET LEASED CAP RATE TRENDS
8.75%
8.35%
7.95%
7.55%
7.15%
6.75%
Q1
2004
Q2
2004
Q3
2004
Q4
2004
Q1
2005
Q2
2005
Q3
2005
Q4
2005
Q1
2006
Q2
2006
Q3
2006
Q4
2006
Q1
200 7
Q2
200 7
Q3
200 7
Q4
200 7
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Retail
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Office Industrial
is the expense side. With a net lease, you’re
not responsible for the expense side.”
Even in the current non-inflationary
environment, “state and local governments
are certainly increasing, or trying to
increase, real estate taxes wherever they
can,” says Ader. Net lease investors can
evade that kind of liability, he points out.
As more assets come into the pipeline,
pricing is becoming clearer—sort of.
“Last year, I’m not sure if there really was
pricing,” says Ader. “This year, we’re in a
very strange environment. The spreads
of cap rates are quite dramatic. You
could go from 6% to 9%.”
While Ader acknowledges that he
hasn’t seen such a wide range in the
deals he’s done lately and adds that the
cap rate depends on the length of the
lease and the quality of the credit, that
6% to 9% is “the general spread. Even
within the same asset class and general
quality, you might see 50- to 100-basis
56 REAL ESTATE FORUM NOVEMBER 2010
there’s also a lack of product, so you
have a lot of buyers chasing a limited
number of assets.” It comes down to
Economics 101, he says: “If buyers out-
match sellers in terms of product, there’s
a chance that cap rates will come down,
and that’s what we’ve seen.”
As safe as the net lease sector is, relatively
speaking, Sughrue points out that there is
still risk involved. Tenants, for example,
may go from being creditworthy to insol-
vent during the life of the lease. “A few
years ago, a Blockbuster or Circuit City was
considered a credit tenant; look at what
happened to them,” he says. “Or Barnes &
Noble. Given the change in the paradigm
of bookselling, who knows if they’ll be
around in a couple of years? You could find
yourself with a retailer whom you thought
was a credit tenant and face significant
lease rejection.”
And while Ader’s current outlook is
generally positive, he cautions, “Pricing
While there are sale-leasebacks going
on, “there’s definitely no velocity right
now.” Fox, by contrast, sees the sale-
leaseback sector growing more active,
especially as M&A activity picks up and
owner-occupiers see the long-term value
of such deals.
