Dallas, TX – 2014′s Dallas ICSC was truly a unique event, featuring the first true “Net Lease Event” hosted at ICSC. The excitement and energy this churned at the conference was palpable. The attendance was great, with a very nice mix of brokers, institutional buyers, merchant developers, and tenants. One attendee commented “In nearly twenty years of attending conferences, this was definitely one of the most productive. The cross-section of investors, owners & brokers with common interests was impressive.”
In the past, ICSC has been very good at catering to nearly all segments of the shopping center industry. For years, other sectors of the retail real estate industry have warranted their own independent events, such as Open Air Centers and LEED Construction, but this was just another step in the recent maturation of the Net Lease sector. However, the signs were already popping up – American Reality Capital purchased CapLease for $2.2 billion and merged with Cole Real Estate in a transaction worth $11.2 billion – creating the largest Net Lease REIT with an enterprise value of $21.5 billion and the largest REIT merger in two years. Publicly traded net lease companies now combine for $40 billion in market capitalization – a larger presence than the industrial real estate REIT sector and on par with lodging and self-storage. In other words, it’s time to shine for the net lease market.
The supply demand imbalance remains one of the more prevelant discussion points. As more retailers begin announcing expansion plans such as Starbucks recent announcement of 700 net new stores, they are offering hope to developers and investors alike. What is lacking however, are more large scale developments, offering true size and scale to everyones pipelines.
Interest rates and the impact of macroeconomic trends remain at the forefront of discussion. Given the issues affecting the supply side, a healthy spread still exists between interest rates and cap rates, offering net lease properties room to absorb upward movement in interest rates. With that said, the lowest risk asset classes with highly compressed cap rates will undoubtedly feel the impact first. As an example, in today’s world with treasuries in the 2.70% range, we are seeing ultra-low risk investments trade at 4-4.25%. This pricing offers little to no risk premium, and as such their valuations will be more closely tied to the movement of treasuries versus higher risk/higher yielding assets.
As the dust settled and attendees worked their way towards the plane flight home, the common take away seemed to be three fold; 1) We are witnessing an incredible time in the net lease sector, both in terms of pricing and global awareness of the asset class; 2) Volume and velocity should remain consistent or improve throughout 2014, and 3) While there seems to be a level of anticipation of interest rate movement, basic supply/demand drivers will keep pricing relatively stable over the coming year.