Anything with a flat rental-rate lease has
seen a rise in cap rates as interest rates
move up and buyers become more sensitive
to the lack of growth, says Matthew Gorman,
an investment properties SVP with CBRE’s
Net Lease Property Group. However, other
segments of the market, such as strong-credit convenience-store gas stations like
Wawa, Sheetz and Royal Farms, have not
seen a significant rise in cap rates and generate a good deal of interest from the marketplace, he adds. “Tenants with a flood of
available inventory—Dollar General,
Family Dollar, Starbucks—are seeing
upward movement on cap rates since buy-ers have lots to choose from, and yield is
one of the only ways to set yourself apart
from the crowd,” Gorman says.
Despite these changes, the type of buyer
interested in net lease has essentially
remained the same. While over the past
year REITs have increased their net lease
holdings, private players continue to dominate the buyer pool. Of those, says Conover,
“cross-border capital from Asia has picked
up, including investors from South Korea
and China,” he says.
A significant portion of private buyers are
motivated by 1031 exchanges, which con-
tinue to be the net-lease sector’s driving
force in terms of activity and pricing, says
Read. Private investors traditionally claim
the largest share of activity, accounting for
37% of volume in the first half of 2017—on
par with the five-year average. “The trend of
what seems to be a never-ending supply of
1031-exchange buyers—including those
making cross-property-type purchases into
more passive, less management-intensive
net-lease assets—should continue,” he says.
But these investors do have their con-
cerns. There are the rising interest rates, as
well as more store closures and consolida-
tion expected. Also, the shakeout in the
retail space will continue for some time.
“Retailers will continue to adapt to an ever-
changing new normal,” Asher says.
Gorman characterizes the net lease mar-ket as being in flux as the divide between
buyers and sellers continues to widen as
interest rates move up, putting pressure on
the low cap rates that are generally associated with long-term net-lease properties.
“That said, it’s still the safe harbor of choice
for most people in 1031 exchanges, and
even though velocity is off of its peak in
2016, deals are still getting done.” ◆
“ We’ve seen an increase in the velocity of
transactions completed over the past six
months as the tentativeness to act has
gone away. Investors are now seeing
more of a runway to this cycle.”
CHARLES DUNN CO. INC.
*As of 12/31/17.
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