NEW YORK CITY—“This industry has just begun,” declared William Kahane, president and COO of American Realty Capital, in his keynote address Wednesday morning for the 12th annual RealShare Net Lease conference, which drew 350 industry professionals. Stepping in for his real estate partner Nicholas Schorsch, who was unable to attend due to a death in the family, Kahane envisioned a massive new pool of potential investors in net lease: the 15 million mass affluents who would see the sector as an alternative to fixed-income securities.
Kahane cited other numbers that would appear to bolster the view that net lease has outgrown its niche status, as some experts suggested in a recent Real Estate Forum article. This year will see about $23 billion worth of liquidity events from non-listed net lease REITs, for example, and $47 billion of non-listed REITs will be available for sale. Then there’s American Realty Capital Properties, the publicly traded net lease REIT for which Kahane is a board member. “From the smallest midget in the room, we are now a $23.5-billion enterprise,” he said.
Although arguably the highest-profile example, ARCP is hardly the only growth story in net lease. Moderator Craig Tomlinson, senior director at Stan Johnson Co., opened the subsequent “Town Hall Meeting: State of the Industry” panel discussion with a chart spanning 11 quarters and showing a steady upward progression in year-over-year volume growth. And one of the Town Hall panelists, vice chairman and CIO Richard Rouse of Lexington Realty Trust, said the average transaction size for his company has doubled to $50 million from just five years ago.
However, not all the numbers are up, at least when it comes to cap rates. Gino Sabatini, co-head of investments at W. P. Carey, recalled a deal his company missed not long ago: a Solo Cup facility in Wisconsin.
Emptied to the bare walls, the facility might have traded for $5 per square foot at a 9% or 10% cap rate a few years ago; instead, it sold last year for $50 per foot at a 7% cap. Once it would have been attractive to WPC at a 9% cap, “but those numbers aren’t there anymore,” said Sabatini. He and other panelists wondered rhetorically whether they were getting paid to take such risks at lower caps, especially as his firm takes a more real-estate-oriented approach to potential acquisitions.
In the view of Richard Ader, founder and managing director at US Realty Advisors LLC, the more common risk for owners is not tenant bankruptcy but disaffirmation of the lease. He said that US Realty Advisors has lately gotten a little more aggressive on cap rates, but also wants to see more aggressive bumps in rent.
The subject of cap rates was a recurring theme throughout Wednesday morning’s panel discussions, with a mixed verdict on whether they’ll be compressing further or expanding as 2014 goes on. There was more consensus, though, on whether properties in tertiary markets are on the table. Tomlinson noted that SJC has found that over the past six or so quarters, 25% to 30% of all net lease properties that trade are in tertiary markets.
“What we’re trying to do is identify a property that a tenant will be in long-term,” said Gordon Whiting, managing director at Angelo, Gordon & Co. “Sometimes that means a manufacturing facility in a town that nobody has ever heard of.”