Net Lease Industry Displays Slow but Steady Signs of Life

Deal volume continued to show marked increase during the first part of 2010.

As single-tenant net lease specialists, Stan Johnson Co. has represented clients in over 1,400 transactions exceeding $8.6 billion in commercial investment property. This unique experience enables our team to provide superior advice during this period of unprecedented market conditions.

Deal volume continued to show a marked increase during the first part of 2010. Stan Johnson Co.’s sales volume was up considerably compared to the same period in 2009. The current pricing of assets appears to be bridging the gap between buyer and seller expectations. The net-leased assets located in strong markets with credit tenants and long-term leases continue to be in short supply. Much of the equity that has been on the sidelines during the past 22 months has returned to the market. The buyer pool continues to expand with REITs raising capital, 1031 Exchanges starting to show signs of life and private investors having limited alternative investments. As a result, competition for these quality assets is strong and we’ve seen a fairly rapid recovery in pricing for many of these assets over the past few months.

Assets in secondary or tertiary markets continue to be challenging in terms of securing reasonable financing alternatives. Life insurance companies’ allocations are up slightly but continue to be focused on the highest-quality assets. Banks continue to focus on addressing the challenges on their balance sheets. As a result, we’ve seen limited financing alternatives for assets in these markets. Spreads between trophy net-leased assets and lesser quality assets in secondary/tertiary markets can easily reach 150-200 bps.

In the fourth quarter of 2009, we projected cap rates would continue to rise slightly by the end of the first quarter 2010. Through our opinion poll, 81 percent of all voters agreed that cap rates would remain flat or slightly continue to rise. The actual cap rate on deals closing in the first quarter was up 30 bps over the 4th quarter closed deals. The average cap rate for deals closing in the first quarter after excluding ground lease deals was 8.62 percent.

Newly-executed letters of intent are an especially important forecasting tool in the current market due to the speed at which cap rates are adjusting. During the past few months, new deal origination has remained strong. Over this timeframe, we have seen cap rates on newly executed LOIs decrease by 20 bps when compared to deals closing during the same period. This is the combination of the stronger market assets where we’ve seen a fairly significant reduction in cap rates over the past few months and the lesser quality assets in secondary/tertiary markets with limited debt alternatives.