according to Glen Kunofsky, specialist inMarcus & Millichap’s net lease propertiesgroup.
These kinds of properties that are placedin service over 15 years are scheduled fordepreciation under the 2017 Tax Cuts &Jobs Act, granting them 100% bonus depreciation for the qualified property acquired.As more investors begin to understandthese tax guideline incentives, spreads havetightened.
Cap rates for assets that qualify for bonusdepreciation have been driven down by 50to 75 basis points, according to Kunofsky.The Marcus & Millichap net lease properties group sold 175 gas stations and carwashes in 2019 under net leases. Before thelegislation, deals on depreciative assets hadcap rates that were in the 7% to 7.5% range,whereas now they’re in the high 5% or low
6% range, according to Kunofsky. “We’reeducating buyers on owningother types of net leases,” hesaid.
As another example, experiential real estate like restaurants and fast food havebecome a considerationbecause investors expectthey’ll be around 10 to 20years from now. Likewisehealth and fitness, and educational assets like schools.
“People see the vision. You have to send
your kids to school somewhere,” Kunofsky
said. “It’s very sticky revenue, and once
enrolled in school, they stay and enroll
multiple kids if they’re happy with it. It goes
well with long-term net leases.”
Private investors and institutional inves-
tors along with for-profit education compa-
nies are selling assets under a net lease as a
part of an expansion, chasing free-standing
schools in lower to upper class neighbor-
hoods. “Real estate investors are pulling up
to the curb because schools cater to 80% to
90% of a neighborhood, and secure long-
term leases,” Kunofsky said. “People are
turning to these assets and saying this can’t
be replaced by something online, and
schools fall right smack dab in the middle
Also gaining popularity in the market
are sale leasebacks, a preferred strategy
among small to midsize developers build-
ing scale in markets, according to Jeremy
Just, president of Blacktide Development, a
real estate development and investment
Sale-leasebacks with corporate tenants
have become a core strategy, according to
Just. “We see sale-leaseback transactions
happening monthly as tenants continue
to seek new capital for expansion and
operation and unloading real estate hold-
ings and disposing of new business,” he
says. “Our ability to buy sale-leaseback
sites in bulk, allows us to get spread-to-
market as opposed to buying each site
Even the traditional asset classes—some
of which, like retail, come with their own
set of troubles—can be a good play for cer-
For example, REIT Agree Realty Corp.
invested $252.1 million in 74 net leaseproperties with 81.6% of rent derived frominvestment grade retailers for the thirdquarter 2019 results.
Now it is upping its acquisition of netlease properties. “Given our strong year-to-date acquisition activity and improved visibility into the pipeline for the remainder of2019, we are increasing our full-year acquisition guidance to a range of $650 millionto $700 million,” said Joey Agree, presidentand CEO of Agree Realty on a recent investor call.
THE OBSTACLE COURSE
Agree Realty, in fact, is a prime example ofinstitutional investors piling even more intothe net lease asset class.
“We have large institutional money
coming in and that can move quickly, and
that can pay premiums for sale-leasebacks,
Developments for historical built-to-suit
uses like restaurant users have become
packed, driving up land prices for sites.
Higher land pricing coupled with rising
construction costs has made it difficult for
developers to execute those projects
because of the fixed-rent structure.
“Tenants will only pay so much of what is
forecasted for sales. With increasing land
and construction costs as rent maintains
stagnancy, it is harder to build,” Just said on
the earnings call.
Investors could back off and focusmore on tertiary markets where there is alower land basis, but that it is viewed ascounterproductive, because users wantthe best sites and best market, accordingto Just. However, in order to get the bestsites and markets to make thebusiness strategy and planwork, volume is necessarybecause the margins aretighter on every deal. “Youneed to have margins to makeit work,” he said.
While some net lease investors prefer to stay huddled upin specific markets, others arelooking elsewhere, pivoting tosecondary markets in stateslike Texas that are business and tax-friendly,says Daniel Herrold, senior director at StanJohnson Co.
The Texas net lease retail market comes
from a position of strength, Herrold said.
“Generally speaking, the state of Texas has
been very strong when it comes to creating
a new net lease product,” he said.
“Development is robust in all of the major
markets, Dallas, Houston, San Antonio and
Austin, and the secondary markets are all
very healthy as well, with plenty of new proj-
ects underway. Thus, the supply of net lease
product has remained steady and constant
across the state.”
And if net lease investors can’t find foot-
ing in a new market, they’re shifting per-
spectives about existing asset uses. There’s
“PEOPLE USE NET LEASE FOR DOWNSIDE
PROTECTION. IT IS THE BOND MARKET FOR THEREAL ESTATE WORLD.”
RANDY BLANKENSTEINPRESIDENT OF THE BOULDER GROUP.
New Horizons for Net Lease. . . continued on page 38