Last Updated: August 5, 2010 04:58pm ET

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Net Lease Insider

Trophy Markets

By Jonathan Hipp
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MIT Center for Real Estate reported a nearly record setting jump in prices for investment grade U.S. commercial real estate in the second quarter. Though sales remained stagnant, investor demand for stable, high quality assets greatly increased; amounting to a 17.3% increase in prices for properties sold by major institutional investors.

David Geltner, director of research at the Center for Real Estate, made this statement in relation to these events:

“High investor demand for safe investments [is] pushing prices sharply up from the deep bottom for “trophy” buildings- prime properties fully leased out to solid tenants”

This coincides with a recent trend of higher price points reached by net leases. However, it has less to do with “trophy buildings” than “trophy markets” with high investment rated tenants. Net leases in populous urban areas are in the perfect position to take advantage of the demand for stability in today’s market.

For further illustration, here is some recent activity witnessed by Calkain:

TD Bank
1515 15th St. NW, DC
Sale Date: March 2010
NOI: $301, 606
Sales Price: $4,300,000
Cap Rate: 7.01%

Walgreens
3130 Lee Highway N. Arl, VA
Sale Date: July 2010
NOI: $500,000
Sales Price: $7,300,000
Cap Rate: 6.85%

Blue Cross Blue Shield
8896 SW 136th St. Miami, FL
Sale Date: On Market
NOI: $468,815
Sales Price: $6,378,435
Cap Rate: 7.35%

The areas these assets are located in (Washington DC and Miami) continue to experience prosperity today. Furthermore, the above properties are located within some of the best parts of those urban centers; ensuring stability and demand. Because of this, investors are willing to pay heavily for “trophy markets.”

(To search across all ALM blogs, go to www.Lexis.com.)

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Comments+ Add your comment

Posted by Keith Wentzel

Jonathan:
I agree with your current assessment of the net lease market as I have seen significant cap rate compression for investment grade NNN deals in the past 60-90 days. As an example, one of my clients recently sold a property that is net leased to an AA- rated company for a 7% cap; my client had purchased the property from the tenant at a 9%+ cap less than 1 year ago. With significant volatility in the CRE market, many investors are seeking the stability and reliable cash flow that a credit net lease property can offer. In addition, lenders are actively seeking loans secured by good credit/good location properties for the same reasons. One of our preferred insurance company lenders is currently offering the following program for small to medium balance, top quality net lease deals: - Loan Amount: $3mm to $12MM maximum
- Loan Terms: 3-5 years
- Amortization: Up to 30 years
- LTV: 60-65%
- Locations: Primary locations, 30-35 largest MSA's
- Property Types: Industrial/distribution, retail & office
- Credit Profile of Tenant: BBB or above
- Length of Lease Term Remaining: Minimum of 10 years, prefer 15 years+
- Pricing: 4.5% to 5% fixed; no floating rate money
- Recourse: None, except for standard carve outs With financing like this available at less than 5% for good credit/good location properties, investors can realize a reasonable return even if they buy at cap rates of 7% or less. Keith K. Wentzel, Managing Director
Fantini & Gorga Mortgage Bankers

August 06, 2010 at 09:45 AM EDT #

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