Fed Interest Rate Plan Fuels NNN Acquisitions

Newmark Knight Frank has hired Matt Berres as executive managing director and co-head of its national net lease platform. Berres position is an expansion of the firm’s net lease group, and Berres expects strong net lease activity this year. The Fed’s decision to stall interest rate increases has helped to fuel activity and boost expectations for the year.

“Early discussion forecasted that we would see the Federal Reserve increase interest rates a few times in 2019,” Berres tells GlobeSt.com. “Historically speaking, cap rates would then soon follow given spreads with net lease investors’ higher cost of capital.  Since the Federal Reserve decided not to increase rates, investors are able to tighten their underwriting and still secure accretive financing for net lease investments.”

The full spectrum of debt capital sources has an appetite for net lease deals, and borrowers can secure healthy loan-to-cost ratios. “Banks are also willing to provide con­struction financing, typically up to 65% to 75% loan-to-cost,” says Berres. “In some cases, borrowers can push leverage higher with financing from debt funds. Most gateway markets such as Southern California are well positioned to reap the benefits of the lending community’s confidence given the market’s high barrier to entry and capital flows we are seeing both domestic and abroad.”

As a result of the access to capital and low interest rates, new capital sources continue to enter the net lease market. “The net lease space continues to see fresh capital being deployed into the sector which is encouraging.  We see capital flow in Southern California from public and private institutions, REITS, funds, and individual investors, notably in 1031 tax deferred exchange situations,” says Berres. “Private capital recorded close to 40 percent of all acquisition volume in 2018 nationwide and we have seen this specific buyer profile here locally continue this trend since the start of 2019.”

The new Fed strategy, however, wasn’t the impetus for NKF to expand its net lease group. The firm has been growing the business since 2017, with the addition of Ken Hedrick, Jerry Hopkins and Andrew Ragsdale. “Late in the market cycle, investors continue to gravitate to net lease properties for the steady income, credit quality and low man­agement responsibilities that it offers as more of a “defensive” strategy,” says Berres. “We don’t expect that theme to change and net lease assets will always be an attractive alternative investment vehicle given the “bond wrapped in real estate” opportunity it offers. I am excited to join forces with this team and look forward to assisting in the growth of the net lease practice Group.”