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NEW YORK CITY—“The biggest surprise to me was the introduction of foreign capital into net lease, and how really aggressive the investors are,” says Gordon J. Whiting, managing director, Angelo, Gordon & Co., a privately-held registered investment advisor focused on alternative investments, which manages approximately $28 billion. “They are coming into less than investment grade, net leasing industry space in secondary locations.”
Foreign capital has long pursued trophy assets such as the Waldorf Astoria, and buildings on Park and Fifth avenues. But now many Asian and Middle Eastern countries are investing in industrial portfolios with real estate in secondary markets all over the country.
Having worked in net leases since 1993, Whiting tells GlobeSt.com he has always thought net lease was a strong asset class—especially considering the risk-reward factor.
“Particularly, when you are in the less than investment grade space, you have the security of real property. If you do your real estate underwriting correctly, you’d have a very big backstop for the value of that property,” Whiting explains. “In net leases, companies are underwriting the credit of the company to make payments but the investment is secured by the real asset.”
Whiting notes industrial real estate in the more secondary type locations has not experienced the huge cap rate compression. “You haven’t seen the massive prices paid per square foot that you have in other classes of real estate, so it has been a lot less volatile.” Investors have taken notice that industrial real estate is not like an office building where the landlord must offer big TI packages. “Tenants move around less and when they do move, the landlords don’t have to refurbish everything,” says Whiting.
In addition to foreign investors, institutional investors are also now pursuing net lease industrial property. Although historically, they shied away from such investments, they are seeing good assets at a lower price per square foot, without the volatility in pricing of the trophy assets.
Whiting is the founder and portfolio manager of Angelo, Gordon’s net lease real estate strategy and has been a major player in the mix of sector trends for decades. Previously, he was an executive director of W. P. Carey. From 2002 to 2010, Whiting served as a member of the Federal Retirement Thrift Investment Board, nominated by President George W. Bush and confirmed by the US Senate.
As one piece of strategic advice, Whiting cautions property owners to focus on the terms and the quality of the lease. With an economic downturn, he predicts net leases will be hit harder than five or 10 years ago when the terms were longer and the lease quality was better for the landlord. One of the things that made net leases a solid investment was they had long leases, typically 20 years. However, Whiting is seeing that term come down.
As the net leasing process has become more competitive, Whiting has observed many investors to get the deal are starting to reduce the quality of the lease from the owner-landlord perspective. Particularly in the less than investment grade space, they are starting to change the terms that had been important to protect both the landlord and the property. He sees this as a disservice to the market.
“A quality lease that protects the landlord will typically have a change of control piece in the lease, so if the tenant is acquired or sold to somebody else, the landlord will still have a tenant of similar or better quality,” he says.
A significant amount of Angelo, Gordon’s net lease business is done with private equity firms, where companies often get sold. “You want them to be sold to another very good company, not someone who is going to raid all the assets or put too much leverage on,” says Whiting. “You want to make sure if you don’t end up with that, you get some protection, security deposit, things like that.”
Betsy Kim is the bureau chief, East Coast, and New York City reporter for Real Estate Forum and GlobeSt.com. As a lawyer and journalist, Betsy has worked as the director of editorial and content for LexisNexis Lawyers.com, a TV/multi-media journalist for NBC and CBS affiliated TV stations in the Midwest, and an associate producer at Court TV.
The Chase Center is a 18,064-seat sports and entertainment arena set to open in fall 2019 in time for the first tip-off of the 2019-2020 NBA season, and will anchor an 11-acre mixed-use complex in Mission Bay.
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