Contributing Author: Sean O’Shea
Over the last decade at various Net Lease Conferences on both East Coast (NYC) and West Coast (LA) I have been a Moderator and Panel Speaker. The most recent one was held in Los Angeles last week.
In attendance, were some of the giants of the Single Tenant Net Lease sector, like Realty Income, Angelo, Gordon & Co. and W.P. Carey. All multi-billion dollar asset owners who have enviable track records of consistent performance. They were an impressive cross-section of high net worth investors, Family offices and investment brokers from all of the major firms, SRS Partners, M & M, HFF, JLL (a lot of initials) and smaller service boutiques as well.
There were a few worthwhile ‘takeaways’. It was a sobering discussion of acknowledging that we are, credibly, at the end of this recent market cycle which has lasted nine (9) years since the Great Recession. Those of us, without short memories or any other impairment, can admit a byproduct of the near Depression shock and the Federal Government’s triage of quantitative easing “QE” to provide structural support and producing a historically unprecedented low interest period until this very month.
The result has been an extended period of compressed cap rates, fueled by Tax-motivated 1031 investors; Cross-border investors seeking a safe haven in US real estate and REIT and their high net worth client base sustaining this market. With the Treasuries moving fairly dramatically upwards in the last 6 months, and the new Fed Chair suggesting that there may be 3-4 increases in calendar 2018, you do not have to be ‘a Wharton MBA’ to calculate the 10-Year T heading toward 4% by end of 2018. Libor debt will be increasing too.
The impact will put tremendous pressure on securing stable, predictable income streams over the next few years that at safe, risk averse returns.
Having said that, real estate, as we often say, is a hard asset. While higher returns are possible in other markets around the World; U.S. Real estate investment is still a safe harbor and will provide ‘bond-equivalent investment’ as a diversification from other fixed income options. But….. “Not all net leases are the same”. It is mission critical to “Sort the NNN wheat from the NNN chaff”. Tenant credit, Lease structure with escalations to address to future inflation hedging, and as always, “Location, Location, Location”.
Access to acute Market Intel has never been more important. These net lease assets and the role of information technology of Internet listing platforms has, effectively, commoditized this asset class. So, now more than ever, local market knowledge that allows a differentiation as you review options is worth the investment of time and your resources.
Contributing Article provided by
Sean O’Shea, Managing Director