Monday, October 5, 2009

Confidence Crisis = Core Investments = Net Lease Properties

By: Andrew Fallon

The word crisis has been used in a variety of ways to describe the economic situation of the past 18-months. The National Housing Crisis. A Global Financial Crisis. Wall Street’s Capital Market Crisis. Banking’s Liquidity Crisis. This past weekend while attending a panel discussion on asset allocation, I heard a new term for the current stage of the crisis – the Confidence Crisis. The crisis terms listed above best describe what led us into the recession and the resulting chain-of-event reactions. The new term, confidence crisis, is important for determining the speed of recovery and how consumers and investors will be allocating their resources and assets. Promising surveys (WBJ) and reports (GlobeSt) have made recent headlines, indicating that investor confidence is mounting as credit rating agencies provide encouraging outlooks for retailers.

These reports are speculative because the confidence crisis stems from fear, lack of trust, and uncertainty, all of which are still very prevalent in today’s environment. As a result, consumers are conserving their discretionary spending, and investors are questioning where their funds can safely go to work for them. There is now more emphasis on wealth preservation and long-term hold strategies. This confidence crisis has highlighted the importance of core investments, which may not be sexy but can act as defensive holders of value.

Enter net lease properties, which attract investors due to the stable and predictable nature of a NNN property’s income stream. Net lease cap rates continue to creep higher, hovering between 7.00 - 8.00% in the NNN market, providing potential value add opportunities for core investment properties. Investment sales transactions are still taking place, although at a much slower pace than in 2007 - 2008. As the confidence crisis unfolds, complex high-risk investment alternatives are likely to be avoided and investors will be allocating more resources to core investments until confidence returns (and let’s hope we remember what this confidence crisis feels like so we can avoid it in the next cycle). In real estate investment terms, what’s more core than a single tenant net lease property?

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