Net Lease Deals Surge in Q1 as Prices Slide: Boulder

At least one category of commercial real estate investment is enjoying a surge in activity, though not in pricing. Net lease transactions rose several hundred percent for all three major net lease property sectors during the first quarter compared to the last three months of 2008, according to a study by Boulder Net Lease Funds L.L.C. The number of industrial net lease properties trading in January, February and March jumped 464 percent compared to the previous quarter, an increase Boulder described as “astounding.” Perhaps more remarkable, industrial net-lease trades rebounded from a fourth quarter during which sales had hit their lowest level since 2005. Other net-lease asset categories also changed hands at a feverish pace during the first part of the year. Volume was up 284 percent in the retail sector and 228 percent in the office sector. Boulder attributes the renewed buyer enthusiasm for these assets to rising cap rates that are easing the burden of debt terms. Nevertheless, the report warns that the momentum may be only temporary. “The transaction volume of the first quarter, while a positive sign from an activity standpoint, is not sustainable unless affordable debt is reintroduced to the marketplace,” the report states. Sellers are finally bringing prices down to market levels, but not quickly enough to offset the obstacles to returns that buyers are encountering. Along with increased transaction volume, the survey also found sharply declining net-lease asset values. Values for office properties coming to market fell 14 percent during the first quarter and were 15 percent lower than prices in the first quarter of 2008. Cap rates were up 29 basis points to 8 percent. In the retail sector, prices dipped 13 percent compared to the last quarter of 2008 as average cap rates increased 29 basis points to 7.8 percent. Though industrial property values also decreased, cap rates held steady at 8 percent. Nearly 23,000 net lease assets were on the market by the end of March, a 9.7 percent increase from the previous quarter, Boulder estimates. But the rising number primarily reflects the lengthening period required to sell such properties. Assets newly brought to market account for only 31 percent of the increase, marking the fourth quarter in a row that percentage has declined, the report notes. The number of net-lease properties on the market will continue to rise as many owners use asset sales as a way to improve liquidity, the report predicts. In other findings: • Available retail assets total 12,368, more than office (6,520) and industrial (4,060) put together. • The aggregate value of available retail assets is $29.8 billion. Net-lease office assets worth $19.6 billion are on the market, and $12 billion worth of industrial properties are available.