Handling Uncertainty in the Net Lease Market
- Mar 15, 2017
If there is anything certain it’s that we live in uncertain times. There’s a great deal of uncertainty surrounding the general economy, which is creating increased uncertainty relating to commercial real estate. There’s a constant swirl of questions, such as the status of interest rates or the ongoing impact of foreign capital. However, these unknowns can lead to positive opportunity on both sides of the real estate transaction.
Consider this comparison: at this point in 2016, our firm Sands Investment Group had 24 exclusive net lease listings and 18 deals under contract, representing approximately 42 percent of the firm’s transactions. At the same point in 2017, we have 53 exclusive listings and only 33 deals under contract, which is about 38 percent, creating a four percent change year over year. What does that tell us? There are more sellers and fewer buyers right now, which is what starts to occur when the market begins to shift.
Despite this, properties are still priced very well, especially from a historical sense. Cap rates may have peaked, but they are not rising in a significant fashion, they’re holding steady. Interest rates have started to increase, but they haven’t gone up significantly, moving from 3.5 percent to just 4 to 5 percent. So while the market is experiencing a bump, it’s not significant.
It’s important as an owner to research the value of your assets today, especially to better understand the real change from a year ago or even three months ago. This is the best way to handle the knee jerk reaction of “I think things have topped out, and I need to sell.” This is a reaction to what is perceived as market risk due to current interest and cap rate changes. Owners feel compelled to sell because they are no longer comfortable with what they perceive as risk. Another reaction is owners wanting to move into a new asset class because they feel what they own today is at its peak.
This provides a buying opportunity. From our vantage point, there are more opportunities and better net lease deals now than a year ago at this time. For this reason, uncertain times drive the demand for good, solid information; I’m not just referring to data points, but anecdotal information on how people choose to handle market changes. Now more than ever it matters more how people perceive the market than the historical data because that will drive their decision making process.
Getting on the phone and talking to buyers and sellers is the best way to handle the lag in real estate information—especially when uncertainty drives contradictions in market reports. Consider that there can be a lag of three, six or even 12 months of solid data. Even now, properties that would have sold in 30 days are sitting on the market for 45 or even 60 days, solely because of human uncertainty. Not that the same price won’t be obtained, but it is taking longer.
There is a great deal of caution out there. But if you dig deep enough you find that the changes are not as great as they may seem, and the opportunities for buyers and sellers are out there.