REITS Priced Out of Net Lease

LOS ANGELES—REITs have been priced out of the net lease market because cap rates have dropped so low, according to Maurice Nieman, SVP at CBRE, and one of the speakers on finance and investment outlook panel at the upcoming Net Lease West conference in Downtown Los Angeles. While preparing for the event on November 12, Nieman took a moment to sit down with GlobeSt.com to discuss current market net lease trends, what his clients want and the topics he is itching to discuss on the panel. Here is he had to say:

GlobeSt.com: What trends are you seeing in the net lease market today?

Maurice Nieman: We're in a very interesting situation in the market. This year, there will be over $50 billion of net lease transactions in the United States, which will eclipse the numbers from 2007. In 2007, it was a $47 billion market, and this year, at CBRE, we expect the industry wide numbers to set a new record. That is pretty interesting. In the period of 2010 to 2015, we have seen the continued downturn of cap rates. I focus a lot on retail, so on the panel, I am going to talk a lot about auto part retailers, where we have seen cap rates come down in the past six months about 50 basis points to about a 6 cap; I will talk about dollar stores, where we have seen just the opposite happen because of several mergers, you have seen cap rates actually rise; and then I will talk about drug stores and a few other property types as well. Money is very plentiful; we have got every CMBS lender in the market looking to do deals, and it has become easier and easier to get loans done and get them processed.

GlobeSt.com: What is driving growth in this market?

Nieman: First, there is a lot of money coming from outside of the country. You have got European money, you've got Asian money, and investors are looking for better returns than you can get in the treasuries. There is a lot of money coming in, and there is a scarcity of assets. In the recessionary period from 2008 to 2012, there really wasn't any new development. While there is a lot of development activity going on now, those properties won't hit the market until 2015 or 2016. So, there is a supply and demand imbalance. However, I also think we might have peaked, and I have to be careful how I say this, but there has been some very interesting news in the last week with the largest owner of net-leased assets having some major internal financial problems. There is usually an event that causes a market to peak or a bubble to burst, and that might be it.

GlobeSt.com: What are your clients looking for in net lease properties?

Nieman: The REIT clients are looking for higher cap rates because they have actually been priced out of the market. Those clients are looking for value, they are looking for term, and they are looking for a little bit more risk right now in order to get the returns that they are offering to their shareholders. In the 1031 market, a lot of second-generation families are saying that they don't want to do what their grand parents did, so they are moving capital out of multifamily and equity markets into net-lease long-term cash-flowing assets, which is fueling demand for net lease properties in the 1031 and private capital markets. That is sustaining low cap rates on drug stores and auto part stores. Although the REITS are priced out, there is enough 1031 activity to keep the market going.

GlobeSt.com: Where do you see the business over the next 12 to 18 months?

Nieman: I think that we have hit a peak in the value of the properties, but I don't think that we have hit a peak in the volume of transactions. With new supply of inventory coming online, I think you are still going to have a lot of velocity. The $50 billion business we have in 2014 is probably going to be very strong in 2015 and 2016. I also think that interest rates are going to stay pretty low until the 2016 elections.