Uncertain Times for the Net Lease Market

The first quarter 2008 Net Lease Market Report by Northbrook, Ill.-based Boulder Net Lease Funds L.L.C. characterizes the current state of the market in the following unusual terms: “The market,” it asserts in the first paragraph, “is difficult to make sense of at the moment.” On one hand, the economy is either in a recession or about to go there; oil prices are setting record highs seemingly every week; demand for real estate is flat or down; and debt financing is hard to get. On the other hand, “asking cap rates appear to be shifting towards a level where deals have the opportunity to close,” the report notes. After seeing the supply of net lease properties on the market take a sharp plunge in the fourth quarter of 2007, many more properties came on the market in the first quarter of this year. For some of these, however, sellers haven’t adjusted their asking prices compared with the summer of 2007, and thus deals involving these properties are much less likely to close. According to the report, the number of closed net lease transactions in 1Q 2008 came in less than 75 percent of the 3Q 2007 total. As of late May, Boulder tracked some 20,964 net lease properties on the market nationwide, valued at an aggregate of $60.5 billion. At the end of 2007, there were 18,164 net lease properties on the market valued at $53.5 billion. Though the 1Q 2008 figures represent significant increases over the previous quarter, they still represent lower figures than at the end 3Q 2007, before the full effect of the subprime meltdown and subsequent credit squeeze were felt. == Still, Boulder says that deals are getting done — under the right circumstances. “In most bid situations, the highest bidder typically requires financing that sellers do not believer to be available,” the report notes. “Therefore, those sellers who actually need to dispose of assets are moving toward taking lower offers which have higher probabilities of completing the transaction.” Retail net lease properties, which have consistently formed the the basis for the largest number and value of deals, continue to hold that position, despite the sluggishness of the current retail market. Retail cap rates for new properties are up 22 basis points over the first quarter, the largest such increase since 2Q 2006. “Much of this increase can likely be attributed to the lack of CMBS financing and slowing multi-family markets,” the report says. “The multi-family sector is suffering from lack of condo conversion opportunities at this down cycle of the market. To compound matters, the hardest hit multi-family markets, Southern Florida and California, also happen to be the home to a majority of 1031 investors.”