Guy Ponticiello

As part of our continuing coverage of the retail sector in our leadup to ICSC RECon 2014 in Las Vegas, we talked to Guy Ponticiello, Managing Director of JLL’s Net Lease group, for the company’s take on the sector. Net Lease has garnered a lot more mainstream investor acceptance in the last few years. Where do you see the sector headed as a result?

Guy Ponticiello: In 2013, net lease transaction volumes reached a record setting $42 billion. In 2014, we anticipate net lease transaction volumes will far exceed prior year’s estimates due to greatly improving financing options and an extensive amount of capital pursuing net lease investments. The comfort level and excitement from investors regarding this segment is creating a strong environment for raising capital by many of the net lease sponsors, particularly through the broker dealer networks which was predominately utilized by the non-traded REITS in raising in excess of $8 billion in equity in 2013. As the product is viewed in a more institutional light and covered more extensively by industry analysts, transaction volumes will continue to grow, pursued by players across the spectrum including REITs, pension funds and institutional investors.

Look no further for evidence of the growth in the net lease sector than the number of new IPOs and mergers and acquisitions in the REIT world in 2013, punctuated by the acquisition of Cole Capital by American Realty Capital resulting in a $21-billion REIT. The net lease REIT sector is quickly approaching $100 billion and is no longer considered “other” as an investment class. Our expectation is that 2014 will likely witness several additional IPOs, particularly for a number of the smaller non-traded REITs and private net lease funds looking to create a liquidity event for their shareholders and seed investors. Are you seeing any external factors contributing to the increased funding in the sector?

Guy Ponticiello: One factor contributing to the success of raising and securing capital is the improving debt market. CMBS is back and readily available, providing quotes that are typically 10-year interest-only, offer tight spreads and 70% LTV. While a strong debt market bodes well for the entire commercial real estate industry, net lease will especially benefit; allowing investors the ability to generate favorable equity returns even at low 6 percent cap valuations

In addition to an improving debt market is the overall improving economy, which provides investors and lenders with confidence and a willingness to spend more dollars. This leads to more development and as retailers look to build, net lease activity should tick upward. What’s the upshot of all this activity?

Guy Ponticiello: The growth of the sector as a whole has led to fierce competition in primary markets. In response, activity is picking up in secondary markets where investors can take advantage of higher yields and this will continue into 2014 and beyond. This activity pushes down cap rates and while there is still a fairly large spread between markets, it’s beginning to compress. However, we don’t expect to see too much upward pressure this year.

We predict yield-oriented investors will continue to be drawn into the space as an alternative to traditional fixed income products while interest rates remain low. Expect yet another banner year for net lease investments.

To see presentation from JLL and Guy Ponticiello on the sector, click the image at the top of the story.