lease investors, we have seen an increase of
participants in the sector, including for-
eign players as well as private real estate
investment funds with cash that needs to
be invested within a designated timeframe.
Some of these newer investors have a
shorter investment and liquidation time-
frame. However, they are at greater risk as
shorter-term market fundamentals change
because their analysis does not focus as
much on the residual analysis in terms of
both the real estate fundamentals and the
creditworthiness of the tenant. But their
potential success is based on a favorable
early exit.”
Ed Hanley, president of Hanley
Investment Group Real Estate Advisors,
tells Forum as supply remains scarce and
yields for single-tenant and net lease
properties in primary markets continue
to compress, an increasing number of
investors are seeking opportunities in
secondary or tertiary markets across the
country to meet their requirements.
“Those investors willing to purchase well-
located net-leased properties in small to
mid-size markets are able to take advan-
tage of slightly-above-market returns
compared to the premium values being
demanded in primary markets.”
Lifestyle is the trend in net lease these
days, Matthew Mousavi, senior managing
director of Faris Lee Investments, tells
Forum. “New fast-casual and healthy-din-
ing and entertainment concepts are
growing at a rapid pace. Younger consum-
ers, particularly the Millennials, enjoy
dining out and having a wide array of
options. Health and fitness uses, particu-
larly the specialized and smaller-format
concepts, are gaining in popularity—
yoga, Pilates, barre, boot camps and other
class formats are taking more free-stand-
ing and in-line space within neighbor-
hood and lifestyle-oriented centers.”
Mousavi says as retailers within this life-
style segment expand, developers are
meeting the demand by constructing free-
standing properties featuring long-term
net leases. “Net-leased restaurant proper-
ties are highly popular with investors of all
types, public and private. These properties
include traditional quick service, fast food
and drive-thru, as well as new fast-casual
and casual-dining concepts. Net-leased
gym and fitness uses are also well received
by the marketplace. Properties leased to
necessity-based users such as grocery stores
and pharmacies continue to transact with
high velocity, as are discount retailers such
as dollar and convenience stores.”
On the other hand, Mousavi says prop-
erties net leased to retailers specializing in
electronics, clothing, soft goods and
housewares are in less demand as these
retailers struggle financially with competi-
tion from e-commerce giants like Amazon.
“Many of these retailers are downsizing,
closing stores and shifting their business
models to attempt to synergize their brick-
and-mortar locations with their online
businesses.”
But overall, investor demand for net
lease properties continues its momentum
across the majority of markets throughout
the country, says Mousavi. “New construc-
tion leased to investment-grade and
strong-credit tenants is trading at ultra-low
cap rates and is in highest demand. For
example, we have transacted and continue
to transact several new corporate ground-
leased and build-to-suit investments within
the top 20 MSAs in the low- to mid-3% cap-
rate range. As investors continue to seek
passive and predictable income, coupled
with the choppy equity markets and slug-
gish—and, in some cases declining—econ-
omies globally, namely China and Europe,
demand for net lease properties continues
to increase.”
While demand continues from private
investors, REITs and institutional buyers,
the sale-leaseback sector of net lease has
increased tremendously in velocity, Chris
Sands, founder of Sands Investment
Group, tells Forum. “Operators, franchi-
sees and corporations that own and occupy
their real estate are recognizing the cur-
rent market opportunity and are choosing
to structure long-term leases and sell their
underlying real estate. In particular, the
long-term leases are highly desirable in
today’s market due to certainty of occu-
pancy and yield for the investor. Overall,
the liquidity of these events allows compa-
nies to infuse capital back into their busi-
ness, acquire smaller companies or expand
into new locations.”
The tremendous deal velocity is also
partially fueled by historic IRC 1031 trans-
actions in which sellers are, appropriately,
exploiting the compressed-cap-rate envi-
ronment before rates change, Sean
O’Shea, managing director for the O’Shea
Net Lease Advisory, a BRC Advisors Co.,
tells Forum. “The very same sellers then
become buyers, and securing an accept-
able replacement is the real challenge in
the current NNN marketplace. Net-leased
assets that have historically traded in the
mid-8% cap range are now being executed
at 6%-cap pricing. Inventories are improv-
ing, but with the crush of capital chasing
net lease deals, buyers/investors are being
asked to recast their yield expectations on
a daily basis.”
NEW FINANCING STRATEGIES
Some changes are occurring in the strategies that buyers are using to finance net
lease purchases. Sabatini says for his firm,
the financing strategies it uses depend on
which of its entities is acquiring an individual asset. “In the case of our publicly
traded REIT portfolio, we finance our
acquisitions with a combination of bal-ance-sheet debt and equity. For our non-traded REITs, which have a finite life, we
typically use non-recourse, property-spe-cific mortgage debt in combination with
equity raised through our non-traded
REIT offerings. We have never been a
highly leveraged buyer. As a result we have
been successful at securing attractively
priced non-recourse debt, and our track
record of closing acquisitions on a timely
and efficient basis has been a differentiating factor for us through our 40-plus-year
history in the net lease investment space.
In addition, our ability to craft more complex deal structures and evaluate privately
owned as well as publicly owned corporate
tenants allows us to secure opportunities
Global REIT acquired a 208,900-square-foot warehouse and distribution facility net-leased
to Core-Mark International for 13 years. The Minneapolis-area property is located in the
Twin Cities’ strong commercial corridor and was acquired for $17 million.
