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How would you assess the health of the net lease industry today?
It’s not a monolithic sector, but generally the various segments of the net lease sector are still healthy. There’s a rough equilibrium between the supply and demand for capital and opportunities. Certainly we’ve seen cap rate compression in the more widely marketed, commoditized credit and property types. But in the less price efficient, more opportunistic sectors in which we have experience and expertise we continue to find attractive risk-adjusted returns. It’s helpful that many forms of net leased real estate don’t lend themselves to speculative development and that in most markets and property types in which we invest there’s been little new construction of competing occupancy alternatives for our tenants. That’s improved our position in many lease renewal discussions. So we believe values and rents will continue to improve in 2013.
What factors do you see impacting the net lease industry in the future, based on current cap rates? (Capital gains, inflation, interest rates, etc.)
The dominant theme since the financial crisis has been the low yield environment fostered by the Fed’s Quantitative Easing. Values improved as the supply of capital increased. But at the same time, the demand for capital also increased as corporate sellers/tenants determined that the pricing for build to suits and sale lease backs was attractive relative to debt. This whole dynamic is expected to change once interest rates begin to rise. When that will occur is anyone’s guess, but quite recently there are signs that the QE policy may be nearing its end.
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