Today, the largest challenge the net lease market faces is asevere lack of inventory. Buyer demand for high quality net leaseassets is high and cap rates have compressed in response to this.However, there is simply not enough high quality inventory to matchdemand. This is forcing cap rates down and clogging the market.

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Buyers want the best assets available; risky assets are nolonger popular. This means high credit tenants in major metromarkets; such as Walgreens and McDonalds. These are coveted becausethey combine low risk with high returns and passivity. Highnet-worth buyers with excess cash are not satisfied with the 1%return they are receiving from banks, are leery of the turbulentstock market and worried about increased inflation. They desire toinvest their cash into secure assets which produce high returns. Inmany ways, net lease investments are the perfect option. Theproblem is there are so few high quality net lease assetsavailable.

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The recession caused companies to halt construction; cutting theamount of new product in market down to a trickle. Even today, weare 6 months to 2 years away from new construction. This processhas bottlenecked supply. Today we are seeing cap rates between5.75-7.50% (they were at 6.75-8.5% six months ago). These arenumbers not seen since the height of the market in 2006. This isnot a long-term trend as much as the odd environment we arecurrently in. Lack of supply plus increases in demand has equaledlower cap rates.

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Current conditions are projected to continue until constructionpicks up and new product beings entering the market. We can expectto see this in the next 6-24 months. Once substantial new productenters the market, we can expect to see a rise in cap rates andtransactions. For now cap rates will remain low.

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Jonathan Hipp

Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.