Transaction Activity Signals Return of Liquidity to Net Lease Market

While it’s clear we are not entirely out of the woods yet, the commercial real estate market, much like the broader U.S. economy, is showing some encouraging signs of recovery.

While it’s clear we are not entirely out of the woods yet, the commercial real estate market, much like the broader U.S. economy, is showing some encouraging signs of recovery. Investment sales volume is picking up from the bottom, capital is coming off the sidelines, and current pricing of assets appears to be bridging the gap between buyer and seller expectations.

The net lease property marketplace in particular is showing its resiliency. Data from Real Capital Analytics shows that, in general, sales volume for single-tenant properties has decreased less than it has for their multi-tenant counterparts, while cap rates have increased less for the single-tenant sector. In admittedly the most extreme example, during the 12 months through Q1 2010, the single-tenant office sector’s sales volume was down 7 percent from the previous 12-month period. That compares favorably to a 66 percent decline for multi-tenant office property sales. In terms of cap rates, single-tenant office properties increased by 107 basis points versus 243 bps for multi-tenant office during the same timeframe.

In fact, in the net lease marketplace—Stan Johnson Co.’s area of expertise—we are seeing a relatively rapid recovery in sales of the highest quality assets. Solid class A properties in major markets are in short supply right now, yet are in demand by buyers to such an extent that we see those that do come to market trading quite quickly and at aggressive prices—even at declining cap rates.

This is, without question, a result of the increased focus on fundamental underwriting—fundamentals that, it is clear with the benefit of hindsight, were lost in the froth of the previous market boom. Today, net lease property buyers do not take for granted a tenant’s credit quality, but pay close attention to market vacancies, going market rental rates, location quality, and the like.

Whether net lease properties in particular or commercial real estate in general, we believe a key sign of a healthy marketplace is the existence of ample liquidity. And while we have not returned to the liquidity that characterized the market just a few short years ago, we clearly see evidence of increased liquidity in the net lease sector in the form of increased transaction levels.

Thanks to the difficult but ultimately healthy correction that has taken place in asset pricing, investors are now shedding their “wait and see” stance and are coming back from the sidelines to actively trade net lease properties. Meanwhile, lenders are picking up their debt financing activity (cautiously and gradually, yes, but another move in the right direction) and are focused on stable properties in strong markets; net lease assets can fit that bill nicely. Those two trends combined make for a promising, and sensible, net lease property marketplace for the remainder of 2010 and beyond.