I Want a WAG!

By David Sobelman

NYSE: WAG! Walgreens has always been the stereotypical net lease investment. Bringing together single-tenancy, strong credit, triple net lease, and a "Main and Main" location, investors have sought out Walgreens as long term/stable investments. This current market cycle has only accentuated the desire for a WAG in one's portfolio. It wasn't that long ago that when you explained the potential return one would receive from this bond-like investment, roughly 6.5 - 7.5%, people would shun the notion of accepting that yield for such a long and finite period. However, compared to today's Money Market and CD rates, that CAP Rate doesn’t look all that bad. In fact, it may be higher than what people are currently receiving in similar "stable" investments.

There are dozens of Walgreens for sale today. But when you have several to choose from, the real estate of the site becomes ever more important. Gone are the days that you could purchase a WAG in Leoti, KS and believe that it is the exact same investment as one in Sarasota, FL. Lenders will look at the assets completely differently, even though the same lease, same credit and same building (most likely) will be present.

So pick your investments wisely as even WAG investors are becoming more discriminating.

The Unknowing Student…

By: Shane Scanlon

As a soon-to-be college graduate, my cohorts and I should gain a sense of freedom; alleviating oneself from a lifetime of structured learning and accruing debt. Graduates across the country are finally given the excitement of trying to map out the next 60 years of their lives; however given the current volatility of worldwide economies, we have found ourselves coping with the greatest deal of uncertainty. With the tailspin of the financial markets and many “gen Y-ers” experiencing a first-hand account of their parent’s retirement plans diminishing, another question remains: What are we to do with our money?

As a child, my father always stressed how first impressions are everlasting, and I find that notion true based on my personal experiences to this point in my life. If true with people, I also feel could be true with investing and in a student’s case, there may be a lifetime of paranoia linked to this practice. Between the Dow Jones standing at a mere 58% today compared to its 52-week high and Bernie Madoff organizing the largest investment scandal by a single person, students are going to be left vulnerable in search of a stable avenue for their money. As surprising as this may sound to some of us within the industry, there are people out there who are not aware of passive investment in real estate. The media has engraved the idea of “Flip This House” to be investment real estate which has left people in their mid-20’s shying away from wanting to learn more due to their home-value tumble. In a study done at the University of Tampa, only 5 students of 40 were aware of what a net-lease investment was, and also 33 individuals identified investing in real estate “unfavorable.” When following up with some of these individuals I had found that none of the 5 students who knew what a net-lease investment was were in the 82nd percentile who suspect investing in real estate to be unfavorable.

I see a long-term opportunity for many professionals involved in real estate investment. Sure, it is unreasonable to assume a 23-year-old college graduate earning $42 thousand annually is going to be able to currently afford a $5 million Walgreens, however the ability to penetrate this market with the idea of educating can be advantageous. By simply creating awareness of what a net leased asset is and the passivity of such an investment, you can engage an entire age group who is looking for that trustworthy “someone” to provide answers during their greatest period of ambiguity.

“With every challenge comes a new strategy for taking action.” – Ralph Marston

I Have A Confession!!!

By Patrick Nutt, Senior Associate

I have a confession to make: I am a commercial real estate broker. Just one part of being a broker is the constant networking and socializing, staying on top of the latest trends and rumors throughout the industry. Nowadays, attending industry functions similar to last week’s ICSC event feels more like going to a support group than a high energy networking event. An introduction to someone outside of the real estate world generally proves to be even worse, with a typical conversation generally going something like this:

Party A: “So, what do you do for a living?”
Me: “I’m in commercial real estate.”
Party A: “Oh, sorry to hear that, how are you doing these days?”
(As a point of reference for some people that may not know, “commercial real estate” is actually my field of occupation, not a rare, incurable disease.)

Sure, the commercial real estate sector has seen better days, everyone knows that, but what most aren’t aware of is the relative stability in the net lease sector. Consider that, according to a recent CoStar report, retail sales volume as a whole was down 43% for 2008 vs. 2007, however during that same span, shopping center transactions alone are down 90%. In addition, when you talk about the re-pricing of assets and adjusting cap rates, Shopping center caps are rising (prices falling) at twice the rate of single tenant sites, rising 145 basis points over the past 12 months.

I suppose I could provide some lengthy, in-depth, study and analysis of what has caused this, but I prefer to take a more “common sense” approach these days. Plain and simple, net leased assets are more often occupied by national tenants, where shopping centers may feature a national anchor, their rent rolls and CAM fees rely heavily on the local tenants, precisely those that may lack the necessary operating capital to sustain the current recession. The passive, long term leases and strong national tenants which generated the popularity of single tenant net leased sites over the past 5-7 years are precisely what have afforded this stability.

Shopping centers, office buildings, and other commercial properties are most often occupied by multiple tenants, signed to shorter term leases of 3-5 years. As these leases prepare to expire, tenants are using this opportunity to request rent reductions, lower CAM contributions, and even shorten primary lease terms. While those landlords deal with shrinking rent rolls, tenant turnover, and rising operating costs due to higher vacancy, finding a buyer to jump into this situation could prove difficult. Add in the fact that financially sensible debt is tough to find, the only deals trading these days seem to be the smaller, lower leveraged purchases under $7M occupied by strong tenants. These criteria sound an awful lot like a typical McDonald’s, Burger King, Pep Boys, Advance Auto Parts, CVS, or Walgreen’s transaction, don’t they???

Like I said, commercial real estate may have seen better days, but if I had to pick a niche to work in during this down-cycle, the net lease nation sure seems to be a pretty good place to be.

Patrick Nutt, Senior Associate