Activity Up in Net-Leased Investments

By Maurice Nieman, Colliers International's Irvine Office Sales activity in net-leased investments is substantially up since the beginning of 2010, but make no mistake we are still in the midst of what is likely to be a long road to full recovery.

Sales activity in net-leased investments is substantially up since the beginning of 2010. Investors in today’s market are showing a flight to quality, zeroing in on retail properties with a single credit tenant. Properties occupied by quick-service restaurant chains and franchises, such as Jack in the Box or KFC, are among the more attractive investments. Many investors are exchanging out of various other property types into these net-leased assets that they view as more stable and secure investments.

The increased investor interest in the quick-service restaurant arena has led to a shortage of supply, resulting in a compression of capitalization rates. Properties trading at approximately $ 1.7 million to $1.8 million have experienced a cap-rate decrease of 50 to 75 basis points during the past year. In some properties, cap rates have dropped by as much as 100 basis points. For example, 12 months ago LA Fitness buildings in Southern California were trading at 10 caps. In the first half of 2010, LA Fitness buildings in the same market were trading at 9 caps.

The lack of supply in the market is due in part to increased hedge fund activity. With bank rolls of anywhere between $100 million and $1 billion, these funds are snapping up net-leased properties with quality tenants, which is driving prices up and further compressing cap rates. Although there has been an increase in distressed net-leased properties on the market, it is mostly occurring among retail strip centers valued in the $2 million to $3 million range and not in singe credit-tenant properties.

The increased activity among net-leased investments indicates that the commercial real estate market is starting to rebound, but make no mistake we are still in the midst of what is likely to be a long road to full recovery.