ATLANTA—While large portions of the U.S. are feeling the squeezeof low cap rates, Southeast net lease is on a hot streak, andnowhere is that more evident than in Atlanta. So says JoeyOdom, regional director of Stan JohnsonCo.'s office here. We met up with this 2014 RealEstate Forum "Fifty Under 40" recipient to get his reading on the currentnet lease retail environment, as well as what he's looking for in2015.

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GlobeSt.com: How would you describe the state of thenet lease retail market nationally and in theSoutheast?

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Joey Odom: The theme remains thesame, with cap rates at historic lows due to the imbalance ofdemand over supply. While interest rates certainly play a role,supply and demand still rule the day. Case in point: when the10-year treasury moved up 100+ basis points in just a few months inmid-2013, cap rates held firm and even compressed in many cases.The low amount of supply has forced many buyers to adjustacquisition criteria, for example, by buying shorter term leases,tertiary markets. As a benchmark, we are seeing 15-year Walgreensdeals trading at cap rates 50+ basis points lower than where25-year Walgreens were trading in 2007, when cap rates were at athen-historical low. The X factor in this equation will be howactive the large net lease buyers—the “market makers”—are in 2015.Assuming those acquisition appetites are still large, it would bereasonable to expect cap rates remaining in the same range.

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Regarding interest rates, while everyone expects interest ratesto increase in mid to late 2015, that may not necessarily correlateto higher cap rates in the near term. Properties that are nottypically subject to financing ($3 million and under) will stillhave a large number of bidders, largely individual investors/1031buyers, and will likely remain unaffected for the short term.

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In the Southeast, we are seeing more activity than ever. From atenant standpoint, the typical cast of characters are leading theway—Dollar General, Family Dollar, bank branches, etc.—with othertenants like Hobby Lobby, Academy Sports, LA Fitness, Mattress Firmand Wal-Mart Neighborhood Market expanding rapidly and gaining moreand more favor from the investment market.

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GlobeSt.com: What are you goals forStan Johnson Company's Southeast region in 2015?

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Odom: Succinctly, we are focused onsustainable growth. In such a robust market it would be easy togrow rapidly and reduce the filter through which we hire or the waywe represent our clients. We aren't just focused on 2015, we arefocused on growth for the next 15+ years. We are also continuallyasking ourselves how we can represent our clients more effectivelyso we are looking at how we further segment the net lease market tocontinue to be deep subject matter experts. In the Southeast, wewill continue to add experts in sub-niches in the net leaseindustry like medical, office, industrial and even divide theretail market into smaller niches such as drug stores, big box,ground leases, etc.

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GlobeSt.com: What challenges in the net lease retailmarket do you expect in 2015?

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Odom: For developers, the challengewill continue to be not only sourcing developing opportunities butsourcing development opportunities that provide an attractivespread between build cap rate and sale cap rate. Tenants havecontinued to squeeze build cap rates to a level that does not makesense for developers in some cases, so locating the “right”development opportunities will be the challenge for developers.

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For buyers, in a product-constrained market, the challenge willcontinue to be locating product that suits their needs, whetherthat need is tied to geography, yield, security, etc.

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For brokers, the challenge will be continuing to provide valueto their clients in this seller's market. One form this can come inis market intelligence—Stan Johnson Company is fortunate that ourfocus is 100% net lease and that we have such a large machinebehind our team of 65 nationwide brokers. What this means to ourclients is that everyone in our shop is contributing to the samedatabase, is sharing up-to-the-minute comps, etc. We are able toprovide real-time market data to our clients that is otherwisedifficult and segmented information.

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Additionally, in this market, many sellers are inundated withinquiries on development projects from buyers and brokers, whichleads them to believe they would be better-suited to sell theproperty without representation. When we have an opportunity totalk this through with a seller, we are able to help themunderstand the value of allowing us to conduct a broad, nationwidesale process. Rather than just accepting the first offer that comesin the door, our clients see the value this process creates byincluding all possible bidders and conducting a competitive bidprocess, which ensures maximum sales proceeds. Stan Johnson Companyis able to leverage the largest and highest-quality net leasedatabase (which is so high-quality because all of our firmcontributes and shares this data internally, rather than all of ourbrokers maintaining separate databases) to accomplish this goal forour clients.

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GlobeSt.com: What advice do you have for investorsof net lease retail properties in 2015?

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Odom: My advice is to understandthe market we are in and adjust your approach accordingly. If arecurring buyer, building trusting relationships with the brokeragecommunity that provides confidence that you will perform iscritical. If a one-off buyer, while there has to be a line in thesand on price, don't allow 5 to 10 basis points to deter you frompurchasing the property that really fits for you. We have seen toomany buyers lose out on deals they really wanted because they didnot give one last push on price, which would have secured the dealfor them.

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GlobeSt.com: How can an investor assure that he willchosen when bidding on a property in today's competitivemarket?

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Odom: This is a great question andthere are definitely things that can help set buyers apart.Assuming near-equal prices, it is paramount for a buyer to be fullydisclosing on their situation and qualifications. This typicallymeans a willingness to provide proof of funds, (if they are in a1031 exchange) a 1031 designation form showing the subject propertyhas been identified, (if they are using financing) a rate sheetfrom a qualified lender, etc. Additionally, the most importantnon-financial term a buyer could use to enhance its position wouldbe the duration of a due diligence period. An equally-priced,equally-qualified transaction would naturally move to the buyerwith the shorter inspection period. There is more demand thansupply and the buyers who understand that dynamic and tailor theirapproach are much better positioned to be awarded deals.

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Geoffery Metz

Geoffery Metz is the content manager for ALM's GlobeSt.com, Credit Union Times and Treasury & Risk. Before joining ALM, he spent several years overseeing the newsroom at the financial wire service Business Wire, with special focus on multimedia presentation for the web.