Gordon Dugan Discusses Change in the Net Lease Market
In what ways have you seen the net lease market change over the past few years?
The changes that I have seen in the net lease industry recently seem to be a continuation of the general trends that I have seen affecting the industry for the last 25 years since I started in the business.The major themes are:
Tenant flexibility – I have seen a significant change in the need of tenants to have some greater flexibility in their tenancy. When I first started in the net lease business in the 80’s, 25 year leases were quite commonplace and now are almost completely gone - outside of retail properties (more on this later). Accounting changes have helped push this trend but in general lease terms are getting shorter due to tenant need for flexibility and investors need to be smart about underwriting the value of the property at lease end.
Financing availability – again, in the 80’s, there was a much smaller number of lenders for net lease assets. Today, there are a wide variety of ways in which companies can finance their net lease assets – lines of credit, unsecured bonds (for certain companies), traditional mortgage debt through balance sheet lenders or conduits, even some have utilized the CLO market. The net effect is that financing strategies can vary and pricing has become more efficient as a variety of investors have found the ability to access lenders for net lease assets.
Number of net lease investors – for most of my 20+ year career at W.P. Carey, there were far fewer investors and it was easier to earn premium returns. Today, we have so many net lease investment companies; I have trouble keeping track of them. The idea of a net lease conference 20 years ago would have seemed very odd to me, today these conferences are packed with attendees both in the business or getting into the business.
I don’t think these are necessarily bad trends or necessarily good trends, they are, in my view, the trends that investors need to understand and find ways to take advantage of them, or avoid the pitfalls that they may present. At Gramercy, we are building a “next-generation” net lease company that we believe will be able to deal with tenant flexibility and compete effectively in a competitive environment due to our focus on particular investment opportunities that we believe we have competitive advantages in buying.
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