Friday, October 14, 2011

Single-Tenant Property Sales Surge To Record Numbers

With money to burn but still having a strong aversion to risk, investors have increasingly turned single-tenant properties into one of the hottest commercial real estate plays in the country. For the last quarter of 2010 and first two quarters of this year, CoStar Group shows that sales of single-tenant properties have averaged more than 10,000 transactions per quarter - the highest quarterly totals on record. And for third quarter comparable sales CoStar is showing that pace is continuing. So far this year, CoStar has tallied more than 30,000 single-tenant sales valued at $29.2 billion in all property types. Retail sales have accounted for about half of the activity. The single-tenant, net lease investment sales market is expected to continue growing, according to Jones Lang LaSalle. "The low interest rate environment and the lack of safe-haven investment alternatives are driving new sources in build-to-suit and sale-leaseback activity, and investors have incredibly healthy appetites for stable and dependable income streams that single-tenant assets provide," said Guy Ponticiello, managing director Jones Lang LaSalle's Corporate Finance & Net Lease division. Fully leased core properties have been highly sought-after by investors, often from overseas, and prices for these properties have been strong, according to Jane L. Mendillo, president and CEO of Harvard Management Co. in her most recent Harvard University Endowment report. "We were able to sell some of our portfolio properties in this category at excellent values," Mendillo said. And now Harvard is ready to invest in new round of such properties. Jones Lang LaSalle's Capital Markets secured $360 million in acquisition equity for a real estate investment vehicle to be managed by U.S. Realty Advisors LLC. The entity, called USRA Net Lease Capital Corp., will pursue the purchase of single-tenant net leased assets throughout the U.S. Harvard University's endowment is the main investor in the venture that could buy more than $1 billion of triple-net leased property. Indeed, institutional and private equity interest in this property type is high. "One way to hedge risks in today's highly volatile and lower-yield environment is to invest in net lease properties, ideally with credit tenants," said Tim Wang, Ph.D., senior vice president of Clarion Partners in New York. "Until recently, the most active net lease investors have been dominated by dividend-paying private REITs and 1031 exchange buyers. However, net lease investments are becoming increasingly attractive to institutional investors because of their longer lease terms, higher income, and lower operating expenses. "For assets in primary U.S. markets on a long-term (10+ year) net lease to a nationally recognized company there is a highly disproportionate supply of money vs. supply of product. This has been a primary driver pushing yields down to levels not seen since prior to the credit crisis," said David B. Chasin, executive vice president of Pegasus Investments in Los Angeles. "Given the macro-economic uncertainty, historically low Treasury yields and breakdown of Wall Street equity markets, the net leased investment market provides an extremely attractive platform." But big money isn't the only player in the market. Mike Eyer, senior advisor for Sperry Van Ness in Fort Collins, CO. said. "Recently individual buyers from the coastal markets are getting even more aggressive and are pricing the institutions out of the market." The increasing demand for these investment leases isn't necessarily coming by choice, added Brian Merzlock, valuation manager at Williams Williams & McKissick auction house in Tulsa, OK. "This is a market-forced move," Merzlock said. "When you are disheartened by the world markets time and time again, you become more restrictive with your capital, and the retail lease market becomes a more appealing to risk appetite." "With companies recording higher profit levels, there has to be some kind of tax shield in the capital fund creating a traditional solution to the nasty volatile bear market trends we are experiencing," Merzlock said. "We are seeing increased stability in those markets that have been traditionally strong and little demand in the newer 'suburbs' where you'll see numerous clusters of new, yet vacant, retail buildings haunting the markets long after Oct 31." Jeffrey Rogers, president and COO of Integra Realty Resources in New York, said, "Investors are favoring this type of investment because capital for this property type has increased and demand for the property type is outpacing supply. There has been very little new development over the past three years and that has caused some pent-up demand." Consequently, "any increase in demand for retail products will increase the desirability of net leased retail investments because demand leads to better tenant quality, which is one of the three metrics investors focus on to decide whether to invest. Increased sales and consumer sentiment leads to higher tenant credit ratings. The other two metrics are favorable lease terms and location of the asset," Rogers said.

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