Net Leases Hit Record High in 2011. Can 2012 Keep the Magic?
- Mar 01, 2012
Along with multi-family, could the net-lease sector be the next big winner in 2012?
Single-tenant net-lease property sales hit a record in 2011, averaging more than 10,000 transactions per quarter, according to a January 2012 report by CapLease, a REIT that specializes in net-lease transactions. Sales volume in the first three quarters of last year exceeded $29 billion, while total year-end volume was estimated to reach nearly $38 billion.
“Low interest rates, economic uncertainty and volatile equity markets will keep the single- tenant net-lease market one of the hottest CRE markets in 2012,” the report noted. “There is certainly a lot of money out there,” Randolph Mason, CCIM, SIOR and a partner with Commercial Realty Specialists, told Commercial Property Executive. “Depending on the tenant mix, (net leases) are absolutely a safe investment because of the lack of volatility.”
Cap rates for the sector continue to compress. According to data firm Real Capital Analytics Inc., average cap rates for single-tenant assets dropped from 7.7 percent at the beginning of 2011 to 7.5 by the third quarter. Comparatively, the average cap rate in 2010 was 7.9 percent. The Boulder Group, a research firm specializing in net-lease transactions, found a similar trend. A fourth-quarter report by the firm found that “the national single-tenant net-lease market transaction volume should remain active due to the stability and financing availability of this asset class.” Additionally, a majority of the firm’s clients are expecting 2012 transaction volume to increase between 5 and 14 percent from 2011 levels—with core assets from investment-grade tenants remaining in the highest demand.
And it is those investment-grade tenants that are making the big moves of late. In a $45 million, triple-net-lease transaction in late December, Jones Lang LaSalle Inc. orchestrated a sale of one of toymaker Mattel Inc.’s design offices from Kilroy Realty Corp. to a vehicle of Angelo, Gordon & Co.—just after the tenant signed a new, 15-year lease.
“Investors are targeting those long-term leases, both from a real estate standpoint and a financial standpoint,” explained Bob Prendergast, a managing director with Jones Lang LaSalle. “Mattel was a high-credit tenant and, based on tenant credit, investors can get high leverage.”
But the real issue is finding the funding. “Bankers have told me that they’re willing to lend money, but getting through government regulations is difficult,” Mason said. “So you’re seeing investors paying all cash or getting very low-leverage ratios.” The result? “A larger number of small transactions, as well as some portfolio transactions by larger buyers, such as pension funds, who have the cash.”
The Boulder Group’s analysis found that, as with Mason’s clients, investors have been challenged to look at their acquisition criteria. Since supplies of investment-grade properties continue to fall, cap rates for well-located, high-quality assets continued to compress much further than the market as a whole. “This can be best illustrated by McDonald’s and Walgreens cap rates compressing by 23 and 25 basis points, respectively, in the fourth quarter,” the firm noted. “In contrast … the overall net-lease retail sector decreased by only three basis points.”
So the stage for net lease is set in 2012, but with a few extra twists from the previous year. While there are still deals to be found, it remains to be seen if investors decide to sign up for the ride once again.