Private investors turned more of their attention to single-tenant net lease assets this year, as institutional buyers pulled back from the property type due to the tightening in the capital markets in the early months of 2016.
“Institutions are getting more competition in the single-tenant space from private buyers,” says Mollie Alteri, associate director at Stan Johnson Co., a brokerage firm that specializes in the single-tenant net lease sector. “High net worth investors and family offices are able to compete with institutional investors in this asset class.”
Single-tenant net lease assets priced under $7 million are drawing increased attention from individual investors and family offices due to their ease of management and income production, Alteri says. Private investors still favor retail properties, but industrial net lease assets continue to deliver the strongest returns in the sector and an increasing number of investors are becoming keen on their performance.
“The vast majority of properties in retail this year have gone to 1031 buyers, family firms and high net worth investors,” says Jimmy Goodman, partner at The Boulder Group, a boutique investment real estate services firm specializing in the net lease sector. “They are playing in the net lease sector because they can achieve higher yields than most treasuries. The investment acts as an annuity. They are good alternative investments for estate planning purposes.” Goodman says. He adds that the greatest demand in the retail sector is for new construction assets with long-term leases.
Asking cap rates for single-tenant net lease retail properties declined 8 basis points quarter-over-quarter, averaging 6.10 percent at the end of the third quarter 2016, according to data from The Boulder Group. Cap rates for net lease office properties declined 17 basis points from the second quarter, reaching 7.08 percent, the company reports. Meanwhile, asking cap rates on single-tenant net lease industrial properties fell by 12 basis points, reaching 7.14 percent.
However, compression on retail cap rates has been easing for some time, and cap rates for industrial and office assets are expected to flatten in the fourth quarter, according to Britton Burdette, director at Stan Johnson Co.
According to data provided by research firm Real Capital Analytics (RCA), year-to-date in 2016 private investors accounted for 66 percent of deals on net lease retail assets, compared to 55 percent in 2015. They accounted for 41 percent of all industrial net lease deals, up from 31 percent in 2015, and 28 percent of office net lease deals, compared to 30 percent in 2015.
Tepid sales activity for single-tenant net lease assets seen in the first half of the year is expected to pick up in the fourth quarters, according to Burdette.
“Our inbound traffic on build-to-suit opportunities for developers has increased, there’s more bidding on that for office and industrial single-tenant net lease,” Burdette says. “We have seen an increase in enquiries from inbound developers needing info on build-to-suit exits,” or the approximate property price when completed.
Private investors are giving institutions a run for their money in the sector, in some cases investing at equal rates year-to-date. Case in point: FedEx Ground.
“For industrial, there is growing demand for anything [related to] e-commerce and logistics. One example is FedEx Ground facilities, a lot of which are new development,” Britton says.
Investors are clamoring to lease to the tenant as the company expands its logistics footprint.
Year-to-date, the volume on FedEx property transactions is almost evenly split between institutional and private investors, with $199 million and $198 million, respectively. Those numbers will likely continue to rise for the remainder of 2016, meeting or exceeding 2015’s totals. In 2015, just under $1 billion in sales of FedEx Ground facilities closed, according to Britton.
“Much of demand over the past year for the FedEx ground facilities is from 1031 exchange and private buyers willing to pay the lower cap rates,” says Alteri. The cap rates on these properties hover around 6.5 percent.
Another recent trend is the emergence of call centers taking up space as single-tenant net lease office tenants.
“We are underwriting and listing more call center deals. Build-to-suit is not as robust, but call centers are going into retrofitted existing space,” Burdette says. “We are not sure why this is happening.”