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NEW YORK CITY-Lack of debt capital and smaller deal size transaction activity were among the net lease market trends discussed both on panels and in hallway conversations at Wednesday's RealShare Net Lease conference at the Marriott Marquis here. So, too, was the topic of a bottoming of the market, which, while anticipated, has yet to make itself apparent, though it certainly is making investors anticipate good buying opportunities.

"We are certainly in the bottom of the trough," though not necessarily at the bottom, said Nicholas Schorsch, chief executive officer of American Realty Capital, speaking on the conference's "Town Hall Meeting: The Net Lease Market Today & Tomorrow" panel. "To get off the bottom is going to take 18, 24, 36 months…and we're going to have buying opportunities all the way along."

Schorsch's fellow panelists agreed. "Until you see some distressed trades, I don't think you've hit the bottom," said W.P. Carey & Co. president and chief executive officer Gordon DuGan.

"I don't think we're going to see uptick for some time," added Richard Ader, chairman of US Realty Advisors. "There's a lot of hurt coming."

"I don't see the bottom for a while. And I don't know what defines it," Ader added. His advice for how to proceed in the market: "I think you need to pick what you want to buy and what you want to own."

Another Town Hall panelist, RBS Global Banking & Markets real estate net lease group managing director Kyle Gore, noted that while the biggest change to the market compared to a few years ago has been the disappearance of the CMBS market, the trend today is a move back to credit tenant lease financing, with financing based more on corporate credit–-just as the net lease market had been historically. "What's old is new. We're back to a corporate bond-driven market," Gore said.

"That's what net lease was supposed to be about--corporate credit," Gore said, not the real estate-driven analysis and pricing that took hold in recent years. And this return could be good news for the net lease market he added, since "the corporate bond market has come up off the mat" this year.

While seller expectations--though beginning to adjust--still represent a hindrance to more transaction activity in the market, the state of the debt market is a particular risk and hurdle to today's net lease deal marketplace, speakers agreed. Challenges raised by speakers included the fact that recourse has been creeping back into lenders' requirements and the seemingly certain likelihood of that loan defaults will be on the rise. The sheer amount of debt available is another; though there was an assumption, when the CMBS market shut down, that the life companies would step in to fill the gap, the reality is "they're not necessarily taking a much larger piece," said Andrew Kroll, director of debt capital markets at SunTrust Robinson Humphrey, speaking on the conference's "The New Realities of Debt Financing" panel.

"We better find a way to tap the capital markets," suggested another Debt Financing panelist, Spartan Capital LLC founder Randy Reiff. The consequences for not, he added, will be extreme, to the agreement of others.

But for all the uncertainty and challenge of the current marketplace, the best buying opportunities are certainly on the horizon, panelists pointed out in an optimistic tone. "I see a lot of opportunity in this market," said Ader, whose company pulled in its investing reigns in the summer of 2007.

"There's less capital than opportunity," agreed DuGan, whose company virtually shut down its fundraising in 2005-2007. Today, he added, "if you're a long-term investor, this is what you want."

Instant Insights /

Net Lease Opportunities Are on the Horizon

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