NEW YORK CITY—It can seem impossible to separate the words 'net lease' from 'cap rate compression.' But as Joshua Pardue, CCIM, of Stan Johnson Company suggests, that's most likely due to the combination of the sector maturing and the economy heating up.
GlobeSt.com met with the director of the company's New York office leading up to the ICSC New York National Deal Making conference event happening here December 8 and 9, to talk about how the industry is changing, the company's expectations at the conference and what they're expecting for 2015.
GlobeSt.com: What are your goals and expectations for the ICSC New York National Deal Making conference?
Joshua Pardue: The conference will give us an opportunity to sit face-to-face with clients who we typically work with on the telephone. We typically can identify a new project by meeting face-to-face with market participants. The biggest goal of the event will be strengthening the relationship with existing clients.
GlobeSt.com: What advice do you have for owners and investors of net lease retail properties as we head into 2015?
Pardue: Investors should be careful of their debt structures, strategies and forecasts as they place investments in an environment that will eventually witness interest rate increases.
GlobeSt.com: What about the net lease market keeps you up at night?
Pardue: At some point it is likely we will see a bid-ask spread gap between buyers and developers of NNN properties due to raising interest rates and cost of capital. During this period developers will have to accept the new normal and re-evaluate the rent constant / cap on cost that they are negotiating into with their tenants. We are already seeing developers enter into “skinny deals,” as the real estate directors for these national tenants negotiate rents, based on their understanding of today's strong NNN market.
GlobeSt.com: How has net lease retail investor interest in secondary and tertiary markets changed during the past few years?
Pardue: We have seen investors adjust their expectation in order to find and acquire product. We have seen investors look to secondary markets in order to find yield as well as shift their tenant credit expectations.
GlobeSt.com: What are your expectations for 2015 net lease market?
Pardue: The market will continue to be strong and favor sellers but we will start to see some softening in certain NNN tenants like dollar stores. On the plus side, the economic growth should drive continued increases in development which will create more product for the pent-up investor demand. We anticipate 2015 total net lease investment sales market to approach or potentially exceed $50 billion.
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