Despite interest rates rising, if only modestly, and the current commercial real estate cycle seemingly plateauing, sentiment remains largely bullish for the net lease sector.
This is the consensus that comes through in the responses to NREI’s first survey of the net lease real estate sector, which was conducted in February.
Sentiments are rapidly shifting as to where we are in the commercial real estate cycle.
In our 2015 research surveys on various property types, the majority of respondents said we were in the recovery or expansion phase of the cycle. In this most recent survey, 42 percent of respondents say we’re now at the peak of the cycle. Only 36 percent believe we are in the expansion or recovery phase. That said, only four percent of respondents said we are in the recession phase and just seven percent said we are at the trough. An additional 11 percent said they were unsure what phase of the cycle we are currently in.
Responses to our survey indicate a big appetite for net lease properties. Only 7 percent of respondents said there is too much supply on the market for investment. Overall, 36 percent said there is the “right amount,” 35 percent said there is “too little” and 21 percent said they were unsure.
Respondents estimate current cap rates for net lease properties to be at about 6.0 percent. In the coming year, respondents expect cap rates to stay the same. Just under half of respondents (48 percent) said cap rates would remain flat. An additional 42 percent said cap rates should increase. Meanwhile, just 11 percent of respondents said cap rates will decrease. (The percentages add up to more than 100 percent due to rounding.)
In terms of money chasing deals, 52 percent of respondents said they would characterize the availability of equity in the net lease sector as unchanged from a year ago. An additional 28 percent said equity capital is more widely available, while only eight percent said it is less available.
Sentiments were similar on the debt side of the equation. There, 48 percent said the availability of debt is unchanged from a year ago. Meanwhile, 32 percent said it is more widely available and 10 percent said it is less available.
On the development front, 36 percent of respondents said there is the “right amount” of development. Another 35 percent said there is “too little,” while only 10 percent said there is “too much.” Another 19 percent said they were unsure.