(Save the date: RealShare Industrial 2012 comes to The Bankers Club, Miami, December 5 – 6.)
LOS ANGELES-Net lease investors are either scrambling to get deals done before year-end or holding off until their uncertainty over macro factors abates, say panelists at last week’s RealShare Net Lease West Conference here. The first panel, titled “Election Year Uncertainty and the Outlook for the Net Lease Investment Market,” was moderated by Gill M. Warner, senior director of investment sales for Stan Johnson Co. The second panel, titled “Retail, Industrial and Office Deal-Flow Outlook,” was moderated by Sean O’Shea, managing director of BRC Advisors.
During the first panel, panelists said that momentum for deals is building due to sparse inventory and inexpensive financing, and ambiguity over the fate of Bush-era tax cuts is causing many players to try to get their assets monetized by year’s end. David Ledy, COO of US Realty Advisors LLC, said the year-end deadline has investors either staying in place due to fear or being driven by market forces to complete transactions. “It will be interesting if the hurricane will act as a stimulus” for deal-making, Leddy added. In fact, Hurricane Sandy prevented 30% of the conference’s guests from attending.
Thomas Roberts, EVP and head of real estate investments for Cole Real Estate Investments, said the office and industrial sectors had have fairly stable cap rates over the last ten months—in fact, the last quarter was the first time in a year that they have been stable and should remain so. Gino Sabatini, co-head of global investments and managing director of W.P. Carey Inc., added that a larger chunk of equity is being required to do deals as lenders remain conservative.
Several of the panelists, including Gordon Whiting, founder and senior portfolio manager of net lease real estate strategy for Angelo, Gordon & Co LP, said that they are looking beyond core markets at secondary or tertiary locations due to cap-rate compression, as long as the deals fit their business model.
With interest rates “artificially low” and no one being sure how long the low rates will last, Ledy said, “The prudent investors asks, ‘Where are the bumps in the lease?’ The last place you want to be is in long, flat leases, and then interest rates rise and you have no increase in rents.”
Most panelists said they aren’t in the construction business because, as Ledy said, “the tenant knows the builder they want.” However, Roberts said taking on the development component “can be a win-win-win” if done as a joint venture.
The second panel, which looked at deal flow in the various CRE sectors, discussed the factors impacting deal flow in the net lease market. Cap rate compression was seen as a significant factor, and Rob Bickel, managing director of Jones Lang LaSalle, said that sale-leaseback transactions for his firm are expected to be 30% of its overall volume this year.
Development is expected to increase this year. Maurice Nieman, VP of investment sales for Colliers International, said “This year developers need to get money out, and it’s the first time they’re seeing the light of day. They’re priming the pump for the next cycle of development as retailers rebuild” their businesses.
Ric Russell, managing partner of the investment division at Cassidy Turley, said that the number of transactions is shrinking even though volume is up, so deal flow has decreased this year. Sterling Champ, EVP of CBRE, stated that there is a “proliferation of specialized funds targeting one small area of the marketplace,” and Nieman added that REITs are getting more involved in the net lease market.
All of the panelists agreed that retail deals are seeing a resurgence and that the office sector has been hit the hardest by the recession. Nieman said that there has been a huge uptick in demand for 1031 exchange properties, and Bickel concluded that post-election, we will see a lot more activity on the whole.
Three-fourths of the panelists in the first panel asked by Warner to foretell the election’s outcome predicted an Obama win; Roberts was the lone dissenter, stating definitively that Romney would come out ahead.
Attendees watched raptly as the first panel laid out their investment strategies moving into the next calendar year. The upshot? More of the same.
The second panel reported a dramatic increase in CTL opportunities and developers priming the pump for the next cycle of development as retailers rebuild their businesses.