LOS ANGELES—A limited product supply is among the top challenges in the net lease market, but for portfolio managers, a limited supply has some benefits, according to Mark Selman, SVP of asset management at American Realty Capital Properties. Selman is speaking on the asset and portfolio management panel at the Net Lease West conference tomorrow in Downtown Los Angeles.

“The limited supply in some ways is an advantage to us because it gives us an opportunity to recycle our portfolio,” Selman tells GlobeSt.com. “A portfolio is sort of a living, breathing item, and because industries and geographies change, we have to go through and rebalance our portfolio to make sure that industry metrics are strong, to help with the equity raise and to deal with unanticipated challenges, like changes in industries, changes in tenant credit, changes in tenant format and so on.”

The limited supply is being driven by demand from net-lease REITs, according to Selman, although some experts explain that REITs have been priced out of the market due to decreasing cap rates. Still, Selman explains, there are more net-lease REITs today than there were two years ago, and those REITs need to maintain a minimum size to remain competitive in terms of cost of capital. “Competition is at an all-time high for new industry assets, and people want larger transactions,” Selman adds.

In property management, however, Selman faces a different set of challenges, which include dealing with tenant and industry fluctuations. “The challenge that we are dealing with is that the tenants are reevaluating the number of spaces they have as well as the space configuration,” he says. “You have to keep going to survive.” As a result, Selman is constantly rebalancing the portfolio, determining the property types that have prime location and configuration, the property types that can be easily refigured for new tenants and the properties that will take more work during tenant turnover. “Because there is a lot of demand for product, people will actually work in a broader category of real estate than they might have before. Everyone wants a 20-year, triple net lease for 3% annual cost,” Selman adds. “Once they see what the demand for that is and start looking at their return requirements, they start to refer back to their credit scale and lease-term scale.”