Net Lease Sees Sluggish Second Quarter

The net lease market has entered a period of lower sales and lower expectations, according to the latest report by Northbrook, Ill.-based Boulder Net Lease Funds L.L.C. During the second quarter of 2008, the report notes, 6,240 net lease assets nationwide were sold, a substantial decrease from the first quarter’s total of 9,292 properties — which itself was historically low. “A comparison to the Q1 statistics shows a skewed reality, and a decrease of legitimate supply currently existing in the market,” Boulder says. Moreover, “the high ratio of older properties on the market illustrates lagging demand, low percentage of completed transactions, and little cap rate movement, as the sellers in the market appear to be holding pricing firm from the levels established six to nine months ago.” In other words, there’s still a disconnect in net lease between what sellers want to accept for their properties and what buyers want to pay, and it has put a crimp in sales volume. The report posits that in the current market, there are two kinds of sellers: those who need to sell for a particular reason, and those willing to put a property on the market, but aren’t willing — and don’t have to — accept what the market is offering. The upshot is the supply figures for net lease properties are artificially inflated. “Given the difficulty in sourcing cost-effective financing, combined with larger economic uncertainties, above-market-priced assets simply cannot be closed in today’s environment,” says the report. Curiously, though the economy is rocky and there’s been a decrease in net lease supply, cap rates haven’t been rising, as would be expected. In fact, cap rates have been “relatively stagnant” since the beginning of 2008, the report observes, citing a number of reasons. One is that there is a reduced sample size. Also, generally higher-quality assets are on the market, as is typical for cyclical market downturns. But cap rates won’t stay stagnant forever, or even for long, at least for some kinds of properties. “Additionally, while it might be too early to accurately determine,” Boulder adds, “there will be a large increase in cap rates for tertiary properties due to $4 a gallon gasoline.”