Contributing Author: Sean O’Shea
There has been a lot of discussion, recently, in broader investment circles, that we have come through ten years since the “Great Recession of 2008-2009,” and that some scale of a Recession is on the horizon, whether Q4 2019 or mid 2020, which suggests, a round of “defensive investing” may be in order.
Having come through this period of historically compressed cap rates (higher prices) across all asset classes, none has been more pronounced than the NNN retail sector of the real estate investment industry.
Immediately after the Great Recession, when debt sources were becoming more diverse, both debt and equity were available, in abundance, in the multi-family or recycled housing sector, since you had a new captive audience of former home owners (newly created renters) who, in some markets, actually rented their own prior homes from their new hedge fund landlords, who had swooped in and bought up bank REO assets en masse in certain markets like Phoenix.
The logistics changes have spurred resurgence in industrial properties, the hottest sector for a number of years, as many smart corporations have made innovative adjustments to better serve consumers.
So, with debt sources available at low rates, encouraged by the Federal Reserve’s effective subsidy to the real estate community, for the last ten years, until very recently, has sustained these significantly higher pricing metrics……But, we are observing some ‘Cap Rate Sticker Shock’ finally beginning to be in evidence in the last two quarters.
It is finally apparent that we are, in fact, at the end of this cycle. Yes?
The impact is the lower spreads will be increasing difficult to stomach by investors, particularly, with even modest leveraged debt.
We have often characterized the “Best-of-Breed” NNN properties as ‘bond-equivalent’ investments.
Okay, the investment tradeoffs are stable, predictable income streams from these hard assets with some additional favorable tax treatment to sweeten the decision-making. Of course, in the event, as a real estate investor, that you have experienced a run up in the value of your current real estate holdings, selling an asset and re-setting your investment table, has continued to fuel the IRC 1031 Replacement portion of real estate deal velocity, too.
Debt is still available; underwriting criteria has been fairly conservative in this last cycle. You can imagine, that in addition to Tenant Credit and “Location, Location, Location”, the structure of the leases has never been more critical in reviewing acquisition candidates to secure best results.
Inflation has been less of a concern in this last ten years; but we are observing NNN investors are demanding scheduled escalations to address that eventuality; and require increases during their holding periods of new ownership.
It will not surprise anyone that tax-free states, like Florida and Texas, have been very favorable targets in the last years to redeploy your resources as investors.
We observe regions, like the Pacific Northwest with strong and diverse regional economies are, also, worthy of additional review and Washington and Oregon, currently have favorable tax regimes.
It will be interesting to see how many of the current tax-free states may consider adjusting their revenue sources with the predictable reductions in Federal revenue sharing, beginning to be reduced over the next years due to Federal Deficit concerns. We’ll see. We monitor these issues closely to inform best decisions and results.
Having access to both on market and off-market assets will be even more critical in the future. Whether a buyer or seller, you are well advised to have access to acute market intel to inform your best decisions in 2019 and beyond.
The O’Shea Net Lease Advisory
734 Silver Spur Road, Suite 200
Rolling Hills Estates, CA 90274
(310) 433-8851 – Direct
(310) 388-0212 – Fax
CA LIC #01438647