Cassidy Turley: Single-Tenant, Net-Lease Investment Overview

In a new report focusing on single-tenant, net-lease investments, Cassidy Turley reveals that ever since the economic downturn, investor demand for low-risk commercial real estate investments has surged.
Andy Bogardus, Cassidy Turley

Andy Bogardus, Cassidy Turley

In a new report focusing on single-tenant, net-lease investments, Cassidy Turley reveals that ever since the economic downturn, investor demand for low-risk commercial real estate investments has surged.

According to the report, multi-family fundamentals have been the first to show significant improvement in the wake of the recession, as investment-grade apartment projects shot to the top of nearly every investor wish list in recent years.

“The major takeaway is that the market is still very strong and the cap rates have stayed low and there’s a lot of activity,” Andy Bogardus, Cassidy Turley’s senior manager director, told Commercial Property Executive. “People are tired of getting that less than one percent at the bank and a lot of 1031 exchange buyers who are seeking yield—and the real good top-credit properties have a pretty low yield—so we are seeing more tolerance for risk and going after higher yield.”

The shortage of available net-lease retail properties has led to the emergence of new net lease product types, with dollar stores becoming a hot commodity over the last two years, despite the fact that this type of tenant was not widely viewed as a significant part of the triple net marketplace before the downturn. Because there are a lot more buyers in the smaller price points, other popular investments include quick-serve restaurants, fast-food restaurants and auto-parts stores.

Additionally, demand for industrial real estate is surging. In fact, aside from multi-family, no other commercial real estate product type has shown as much improvement when it comes to underlying fundamentals.

Investments are popular around the U.S., and Bogardus said several areas are rising in investment popularity.

“Cap rates seem to be the lowest in California and that’s popular,” Bogardus added. “Other places that are doing well are where the new product is being built, and that’s in the Southeast up along the Atlantic Coast, all the way up to the Northeast and the Eastern Shore.”

Looking ahead to the rest of 2014, the report predicts rising interest rates are pretty much a given. However, the winter economic slump likely means that instead of seeing the Fed raise rates by the start of summer, hikes are most likely going to be delayed until autumn.

“It’s all interest rate driven and the amount of inventory, so if interest rates start to head up, the cap rates will head up,” Bogardus concluded. “If people are buying these net-lease properties today, they are thinking about putting long-term debt on it as well because interest rates loans are low too, so they can hedge that bet by putting debt on it also.”