Timing the Market: An Open Letter to Net Lease Sellers

While today's market conditions favor net lease sellers, it's important for investors to understand market trends and potential challenges when considering a sale, notes Stan Johnson Co. Director Anne Perrault.

Anne-PerraultAs we approach year-end, it’s an excellent time to take pause and evaluate market conditions, as many investors will decide in the coming days and weeks whether they plan to sell their net lease property this calendar year. Many of you will study historical trends and try to time the market just right to present your offering to potential buyers, while others will read every press release, trend summary and market analysis report to gain as much insight about current conditions as possible. Both strategies are valuable since the decision to sell in today’s market truly lies in the details.

At a high-level, average net lease cap rates remain at, or near to, record lows. In the retail sector, cap rates bottomed out officially in third-quarter 2016, just north of 6.0 percent. Since then, we’ve seen only modest increases. Single-tenant retail cap rates were the lowest across the major property types at 6.11 percent as of mid-year 2017. But this isn’t the complete story—sellers will need to be well informed about micro-trends across the sector, too. Some segments of the market are not performing as well from a disposition perspective. Bank assets and select retailers occupying mid-size boxes are examples in which investors are underwriting to a very tight standard—both cap rates and inventory levels are rising.

Time to sell

Even within these subsets, however, there are still opportunities and bright spots in the market. So sellers, if you’re asking yourself, “Is now a good time to sell?,” the answer is yes. Inventory in the single-tenant net lease space has been declining steadily over the last year. Many expected increases in the federal reserve rate to create a pricing imbalance in 2017, but this has been slower to materialize than originally projected. Real estate fundamentals, including location quality and rent sustainability, are again at the forefront of the decision-making process for buyers, meaning that even challenged property segments can transact and be competitive if fundamentally sound and if priced correctly. Sellers bringing assets to market with correct pricing will experience an efficient marketplace. But be cautious: the opposite is just as true, and a listing can stagnate quickly if priced incorrectly or too aggressively.

Despite today’s favorable conditions, some of you will elect to wait. And while it is hard to see a compelling case to hold off selling for six months or more, it’s impossible to predict the future. We can’t say for sure what extraneous conditions will be positively or negatively impacting the market or investors six months from now—all we know is that your lease term remaining will be six months shorter. Therefore, sellers choosing to hold their listings should be aggressively and thoroughly monitoring external influences that have the potential to impact future pricing trends. There are plenty of political and economic influences to be aware of, and nearly all of them are out of our control. Economic impacts, international relations, or potential changes to the tax code, for example, could all have significant effects on investors in the future.

While today’s market conditions appear ideal for sellers, the decision to divest of an asset is in the details. With cap rates back on the upswing, albeit very slowly so far, sellers must have a firm grasp of market trends and potential external influences. And perhaps the most important advice continues to be that of pricing: appropriate pricing is imperative in any market, but especially in today’s climate.