More sector-focused insights below:
Overview :: Office :: Industrial :: Multifamily :: Retail
In evaluating net lease opportunities, the following five key investment parameters drive asset valuations and investment considerations:
Five macro investment parameters
- Long-term leases: 12+ years of lease term
- Investment-grade credit: S&P: AAA to BBB-
- Strong rent growth: Steady rent increases through the life of the lease
- Mission critical location: Site-level operations are dependent on the regional area
- Primary market: Specifically classified for each sector
Net lease sales volumes remain stable despite a decline in deal closings
As pricing and opportunities have started to plateau for the overall sectors, varied sources of capital are increasing their focus on the net lease sector. This has sustained momentum, with volumes stable and cap rates maintaining compression.
Overall net lease sales stable in first half of 2017
Larger average deal sizes drove modest increases in office and industrial sales, while limited opportunities drove a modest decrease for the retail sector
A strong pipeline of large deals will continue to sustain sales volumes for the remainder of the year, while the number of deal closings will remain down.
Cap rate movement diverges through the first half of the year
The persistent search for yield through various market types has brought cap rate movement to diverge across varying profiles of assets. While the demand for office opportunities featuring all five key net lease investment values remains strong, the market migration has led cap rates to seemingly reach a low point for this profile of product in gateway markets. Consequently, more participation in secondary and tertiary markets is driving further compression – down an average of 38 basis points year-over-year.
Net lease cap rates continue moderate compression
Cap rates have continued to compress for all sectors, yet retail and office assets in primary markets are starting to see cap rates softening.
Sources of
Pricing dynamics causing a reevaluation of risk strategies
Risk within the net lease space is unique in that it is mitigated by five key investment values an asset can feature:
- Long-term leases
- Investment-grade tenancies
- Strong rent growth
- Mission critical location
- Location in a primary market
The most ideal acquisitions feature four to five values offering greater risk mitigation and thus have the lowest yield. Pricing is affected as these values become absent, with cap rates softening as the risk increases.
Through the last few quarters, funds with growth pressures have eagerly deployed capital in the net lease space, with some becoming increasingly flexible in their risk requirements in return for accretive yields.
A dichotomy in forward-looking sentiment has many net lease participants wondering if the market cycle is nearing its end, or if the momentum will continue through an extended cycle. Despite concerns of interest rates increasing, tax reform uncertainties and speculation on impending FASB accounting changes, market activity provides a clearer perspective on what will drive activity over the next 12 months: capital demand. The steady sales and healthy pipelines within an expanding buyer pool are expected to continue over the next 12 to 18 months given net lease’s bond-like returns and favorable long term performance. Absent a major economic event, cautious optimism remains the norm.
More sector-focused insights below:
Overview :: Office :: Industrial :: Multifamily :: Retail
Credits:
Created with images by MichaelGaida - "architecture modern building" • MichaelGaida - "architecture modern building"