Posted in Globest.com/Florida on July 5, 2009
By David Sobelman
I first heard the phrase “flight to quality” during my first job in commercial real estate. I was a research analyst sitting in a cubicle, staring at my computer screen and wondering why there was over 500,000 square feet of negative absorption of office space in Washington, DC--in one quarter.
The year was 2002. That was quite a rude awakening for not only me, but every landlord in our nation’s capital. What do you do with all that vacant space in such a short period? The answer: Lower your rental rate. Tenants began filling vacancies and getting better office space. It was a flight to quality.
But net lease investments are different when considering quality, which is a popular word these days. In the net lease investment industry, we’re typically not discussing the leasing of a single-tenant office building, a large warehouse or a small retail center. We’re discussing investments--the purchasing of assets for an immediate return.
So how does one define a flight to quality when considering a net lease? It depends who is buying.
People want more for their money in today’s market. However, quality varies in any investment, let alone net leases. The first quality adjustment we are seeing is a desire for choice real estate. Location is still of the utmost importance to investors.
Buying a Walgreens location in Dubuque, IA is different than buying one in New York City. You may be getting the same credit and same lease terms, but the real estate has become a big consideration for investors today.
The investor has to know that at the end of the day, they are still buying real estate. Consider the worst-case scenario: If my great tenant leaves, what am I left with? Where is the building? What is around the site? How can I access it? We are all real estate professionals, but the quality real estate was forgotten for many years.
Additionally, investors are focusing more on the credit of their tenant. Gone are the days that you can put a very aggressive cap rate on a one-unit franchise operator of a concept that you have never heard of before and close the transaction in 21 days.
The investor’s flight to quality for tenancy has become drastically more apparent in the last 12 months. In 2008, when it truly did seem that the sky had fallen and was actually beginning to dig a hole to the center of the earth, no one was really sure of how to rate a company’s credit. Those institutions that had a credit rating by a major agency, such as Standard & Poor’s or Moody’s, were being questioned because they got so many things wrong.
Companies with “A” credit or better were going bankrupt or being downgraded so fast that it was hard to keep track of them. The term “investment grade” almost became a joke. But now that the economics of the industry have calmed down and recovery is under way, the credit of a company seems to have taken on a new meaning.
History has proven that credit matters. Over the last half-decade, it was proven that if you had a net lease investment, you could get financing. Now, you truly need a credit rating of “A” or better to get above-average financing. Otherwise, you’re left with a full recourse loan with a very low loan-to-value ratio.
Credit tenants are still comparably garnering somewhat stable cap rates, but those that lack the financial reporting worthy of an overly scrutinized underwriting process are seeing their returns rise and prices lowered because of the perceived risk. The credit of the tenant has seen new meaning and the credit tenants are sought out more so now than ever before.
Lastly, the lease terms are becoming a talking point that quality seekers seem to be discussing more. The words “absolute” and “bondable” are heard more and more as investors seek new purchases. Triple net assets are trending to become, well, triple net.
The mere definition of the investment class started with the understanding that the tenant would be responsible for taxes, insurance and maintenance. Yet somehow over time, triple net became defined however you wanted to define the structure of the lease. Maybe the landlord is responsible for the roof and structure of the building, but not the daily maintenance. Or maybe the HVAC system falls on the landlord, but no other items.
Whatever the case may be, triple net became double net, single net or half a net. If there is some responsibility of a landlord, then the investor wants to be compensated for it with a higher return. So when an investor says that they want a triple net investment, they want to sit back, collect a check and never even get a phone call about the property. They want to think of the property once a year when they are filing their tax returns. The flight to quality is in the lease terms and investors are seeking out the absolute, most passive form of real estate ownership.
But a true flight to quality still depends on the individual investor. We have to realize quality can be defined a number of different ways. But net lease investments have truly seen a change in recent months, with scrutiny being placed on the attributes of an investment that haven’t been considered in years.
One may be able to take a great parcel of land but have it encumbered with an old and outdated building with a terrible credit tenant and turn it into a goldmine over time. But today’s investor has a somewhat different destination--a nonstop flight to an oasis called “quality.”
Showing posts with label Commercial Real Estate. Show all posts
Showing posts with label Commercial Real Estate. Show all posts
Wednesday, July 8, 2009
Wednesday, June 10, 2009
Jonathan Hipp of Calkain says $10 Million is the New Black
Jonathan Hipp, President/CEO of Calkain Companies, gives his insight on the current condition of the commercial real estate market. While general perception would have you believe transactions have come to a standstill, the reality is much different. Deals are still being done and money is still being made. Preference has simply shifted to lower cost (and lower risk) purchases. To find out more, check out the video.
Real Share’s annual Net Lease Conference on April 29th, 2009
Real Share’s annual Net Lease Conference on April 29th, 2009
Monday, May 4, 2009
Medical Office Real Estate May Be the Way to Avoid Un-Healthy Investments
By Winston Orzechowski
While many real estate investments are losing value, the Medical Office sector has shown remarkable resilience. The segment is holding up much better than other property types and this trend projects to continue. So who do we have to thank for this bit of good news? Well the Baby Boomers of course. Though a recession can slow many things down, one thing which it cannot alter (although it may seem like it can) is the progression of time. The simple fact is that as more boomers age, they will inevitably have an increased amount of medical issues which subsequently turn into an increased amount of medical costs. This all adds up to relatively inelastic demand for medical services and their pertaining medical office buildings. So if you’re considering investing in today’s market, there may be no firmer investment than our nation’s infirmaries.
While many real estate investments are losing value, the Medical Office sector has shown remarkable resilience. The segment is holding up much better than other property types and this trend projects to continue. So who do we have to thank for this bit of good news? Well the Baby Boomers of course. Though a recession can slow many things down, one thing which it cannot alter (although it may seem like it can) is the progression of time. The simple fact is that as more boomers age, they will inevitably have an increased amount of medical issues which subsequently turn into an increased amount of medical costs. This all adds up to relatively inelastic demand for medical services and their pertaining medical office buildings. So if you’re considering investing in today’s market, there may be no firmer investment than our nation’s infirmaries.
Thursday, April 30, 2009
1031 Thy Name is Diversity
By Winston Orzechowski
It is common to think of a 1031 transaction as one involving land for land or buildings for buildings. However, this is a tragic oversimplification.1031 transactions deal with “like-kind” property and in most people’s minds “like-kind” means both pieces of property are alike, such as trading land for land. But do not follow this train of thought when dealing with real estate; in the eyes of the IRS “like-kind” refers to all “qualified real estate”, opening the doors to a wide array of transactions.
For example:
In one case a person wished to exchange18 oil wells valued at 1.375 million for an apartment or office building. If they were to simply sell the oil wells and buy their building of choice, they would face a substantial capital gains tax; however, through the use of a 1031 they are now making this exchange tax free. That is because oil wells are considered qualified real estate and are eligible for a 1031 involving all other qualified real estate. Other qualified real estate types include: Coal mines, mineral rights, timber, and vineyards.
This all means that investors have an immense selection of properties to both acquire and exchange using a 1031.
Note: The example above pertains to real estate. A 1031 can also be used for property other than real estate such as medical equipment or airplanes, in which case the property would have to be alike i.e.: airplanes for airplanes, medical equipment for medical equipment.
It is common to think of a 1031 transaction as one involving land for land or buildings for buildings. However, this is a tragic oversimplification.1031 transactions deal with “like-kind” property and in most people’s minds “like-kind” means both pieces of property are alike, such as trading land for land. But do not follow this train of thought when dealing with real estate; in the eyes of the IRS “like-kind” refers to all “qualified real estate”, opening the doors to a wide array of transactions.
For example:
In one case a person wished to exchange18 oil wells valued at 1.375 million for an apartment or office building. If they were to simply sell the oil wells and buy their building of choice, they would face a substantial capital gains tax; however, through the use of a 1031 they are now making this exchange tax free. That is because oil wells are considered qualified real estate and are eligible for a 1031 involving all other qualified real estate. Other qualified real estate types include: Coal mines, mineral rights, timber, and vineyards.
This all means that investors have an immense selection of properties to both acquire and exchange using a 1031.
Note: The example above pertains to real estate. A 1031 can also be used for property other than real estate such as medical equipment or airplanes, in which case the property would have to be alike i.e.: airplanes for airplanes, medical equipment for medical equipment.
Monday, April 13, 2009
Teaching New Dogs Old Tricks and Old Dogs New Tricks
By: Patrick Nutt
While it may not come as a surprise to everyone, the real estate market and broader economy is in a bit of a downturn. Many have focused their attention on the negative signs and headlines cast through every channel of media, but I’ve taken a much more micro-economic view; as in the economy located within the confines of my personal checking account. I quickly realized that there wouldn’t be any deposits into my “local economy” from TARP or the federal stimulus plan, so the best way out of this recession is to put my head down and work hard, with the belief that it will all pay off one day. A quick survey of my inbox indicates that many brokers have left the industry, whether by force or by choice, which instantly creates an opportunity to grab market-share and build a pipeline to benefit from the eventual recovery.
There are countless articles, webinars, seminars, teleconference marketing symposiums, and any other fancy titles for listening to people tell you how to do something better these days, most of which focus on tips of the industry pros for surviving the current down cycle through using technology, and being creative. I recently listened to a teleconference call discussing marketing and branding ideas for commercial brokers, and one example was discussed where a broker made bobble-head dolls of himself to pass out to his clients and prospects. This may be an extreme example, but it just goes to show you that necessity is the mother of innovation, and right now, generating business and maintaining relationships is a necessity.
Every possible form of electronic communication and networking seems to be on the forefront of discussion, covering everything from Myspace and Facebook to using Twitter and blogging. The popularity of these items and technological gap between industry veterans and the younger members in the brokerage community has caused many “old dogs” to try and learn a new trick or two. At the end of the day though, no “Tweet”, text, or email will be able to replace the old fashioned phone call, face-to-face meeting, or even a written letter. I have been fortunate enough as one of the younger members of this industry to learn from veterans that still preach the basics and have seen it pay off. Now’s not the time to skip the basics and forget the fundamentals, so when you’re trying to teach an old dog a new trick, don’t forget the learning can flow both ways, and it’s never too late for a “new dog” to learn some old tricks.
While it may not come as a surprise to everyone, the real estate market and broader economy is in a bit of a downturn. Many have focused their attention on the negative signs and headlines cast through every channel of media, but I’ve taken a much more micro-economic view; as in the economy located within the confines of my personal checking account. I quickly realized that there wouldn’t be any deposits into my “local economy” from TARP or the federal stimulus plan, so the best way out of this recession is to put my head down and work hard, with the belief that it will all pay off one day. A quick survey of my inbox indicates that many brokers have left the industry, whether by force or by choice, which instantly creates an opportunity to grab market-share and build a pipeline to benefit from the eventual recovery.
There are countless articles, webinars, seminars, teleconference marketing symposiums, and any other fancy titles for listening to people tell you how to do something better these days, most of which focus on tips of the industry pros for surviving the current down cycle through using technology, and being creative. I recently listened to a teleconference call discussing marketing and branding ideas for commercial brokers, and one example was discussed where a broker made bobble-head dolls of himself to pass out to his clients and prospects. This may be an extreme example, but it just goes to show you that necessity is the mother of innovation, and right now, generating business and maintaining relationships is a necessity.
Every possible form of electronic communication and networking seems to be on the forefront of discussion, covering everything from Myspace and Facebook to using Twitter and blogging. The popularity of these items and technological gap between industry veterans and the younger members in the brokerage community has caused many “old dogs” to try and learn a new trick or two. At the end of the day though, no “Tweet”, text, or email will be able to replace the old fashioned phone call, face-to-face meeting, or even a written letter. I have been fortunate enough as one of the younger members of this industry to learn from veterans that still preach the basics and have seen it pay off. Now’s not the time to skip the basics and forget the fundamentals, so when you’re trying to teach an old dog a new trick, don’t forget the learning can flow both ways, and it’s never too late for a “new dog” to learn some old tricks.
Friday, April 3, 2009
What is Your Generation?
by Anonymous
Every generation wonders what the future holds for them, and every generation also has its own set of challenges to overcome. And guess what? People always manage to survive. They work the problem. The human spirit is a wonderful thing! And a lot of good changes happen when times are tough; it’s just part of a cycle. Those before us struggled and worked hard to make the world a better place for themselves and for their children. So here we are; now it’s our turn to figure it out! It’s our turn to be the grownups.
Life is a roller coaster ride. Each generation gets a new ride. And each generation is confronted with and ultimately defined by its own set of circumstances. No doubt, some generations are luckier than others. Some are faced with wars, some peace, good financial times, bad financial times, excesses, sacrifices. Luck of the draw… Some get to ride years with healthy economies, real estate booms, low interest rates, and even surprises such as Internet booms. Others get to ride through weak economies, Stock Market crashes, real estate busts, high interest rates. I guess if you live long enough, you’ll get to see it all!
Just have to ride it out. Maybe let out a big laughing scream with your hands in the air as your roller coaster hits the zero gravity drop! Make good decisions, stay healthy and be grateful spring is here! Be thankful for all the good, and muddle through, just like all the generations before us did!
Every generation wonders what the future holds for them, and every generation also has its own set of challenges to overcome. And guess what? People always manage to survive. They work the problem. The human spirit is a wonderful thing! And a lot of good changes happen when times are tough; it’s just part of a cycle. Those before us struggled and worked hard to make the world a better place for themselves and for their children. So here we are; now it’s our turn to figure it out! It’s our turn to be the grownups.
Life is a roller coaster ride. Each generation gets a new ride. And each generation is confronted with and ultimately defined by its own set of circumstances. No doubt, some generations are luckier than others. Some are faced with wars, some peace, good financial times, bad financial times, excesses, sacrifices. Luck of the draw… Some get to ride years with healthy economies, real estate booms, low interest rates, and even surprises such as Internet booms. Others get to ride through weak economies, Stock Market crashes, real estate busts, high interest rates. I guess if you live long enough, you’ll get to see it all!
Just have to ride it out. Maybe let out a big laughing scream with your hands in the air as your roller coaster hits the zero gravity drop! Make good decisions, stay healthy and be grateful spring is here! Be thankful for all the good, and muddle through, just like all the generations before us did!
Wednesday, March 25, 2009
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
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
Monday, March 16, 2009
Musings Of A Veteran Broker
By Guenter Manczur
Those of us who have been around long enough to see prior real estate cycles remember only too well the period of 15% – 18% interest mortgages, the closure of numerous industrial banks and the much larger savings & loan debacle that was followed by an era when RTC-controlled properties seemed to be the only ones being sold.
Yet here we are, some 20 years later, having recently experienced an unparalleled period of price appreciation and economic growth in almost all sectors of the real estate industry. The expectation of constantly increasing prices has been the business model for many property owners, and countless purchases were made with the full expectation that an owner could re-sell any property, any time, for a profit.
Is it reasonable to expect that explosive growth can continue unchecked for long periods of time? Of course, not. Most of us agree that prices fluctuate with supply and demand conditions, and that periodic imbalances will result in price corrections.
In these times of being inundated by a barrage of negative financial news, it’s helpful to remember that commercial real estate transactions will continue to happen even in a down-market, albeit at a slower pace.
Those of us who have been around long enough to see prior real estate cycles remember only too well the period of 15% – 18% interest mortgages, the closure of numerous industrial banks and the much larger savings & loan debacle that was followed by an era when RTC-controlled properties seemed to be the only ones being sold.
Yet here we are, some 20 years later, having recently experienced an unparalleled period of price appreciation and economic growth in almost all sectors of the real estate industry. The expectation of constantly increasing prices has been the business model for many property owners, and countless purchases were made with the full expectation that an owner could re-sell any property, any time, for a profit.
Is it reasonable to expect that explosive growth can continue unchecked for long periods of time? Of course, not. Most of us agree that prices fluctuate with supply and demand conditions, and that periodic imbalances will result in price corrections.
In these times of being inundated by a barrage of negative financial news, it’s helpful to remember that commercial real estate transactions will continue to happen even in a down-market, albeit at a slower pace.
Tuesday, March 3, 2009
It’s Darkest before the Dawn
By Jonathan Hipp
It is very easy to justify why it’s okay to be mediocre in today’s real estate market when you listen to the news in its various forms. And then there are all your colleagues and competitors validating all your fears. Markets like this require you to adopt the champion’s creed if you are going to succeed and grow even when all common sense seems to justify the opposite way of thinking. I believe that misery like’s company and it’s easy to become involved in those types of conversations and relationships with family, friends and associates. The thought and attitude used to be that the good times would never end as capital was flowing relentlessly and it seemed everyday that somebody was flipping a property for a big profit and brokerage commission even before they had gone to settlement. It was so easy; we all had keys to the castle. Many brokers and investors made big money by just showing up and playing the game. So here we sit today licking our bruised wounded egos and reflecting and asking where we go from here. I find this from Roger Staubach, former chairman and CEO of the Staubach Company, very fitting for the challenges our industry and ourselves face today.
“To me success is being able to feel good about how you’ve done things. You have to have balance in your life. You can’t think only about ‘what’s in it for me?’ You have to give back and ask for help and say you’re sorry and contribute to the success of others. And you can never give up. Athletics taught me that. You must work hard, prepare, learn from your losses and continue to fight until the very end.”
It’s very true we don’t know how long this cycle will last and we probably haven’t reached the lowest point yet. But I can tell you that it’s always darkest before the dawn.
It is very easy to justify why it’s okay to be mediocre in today’s real estate market when you listen to the news in its various forms. And then there are all your colleagues and competitors validating all your fears. Markets like this require you to adopt the champion’s creed if you are going to succeed and grow even when all common sense seems to justify the opposite way of thinking. I believe that misery like’s company and it’s easy to become involved in those types of conversations and relationships with family, friends and associates. The thought and attitude used to be that the good times would never end as capital was flowing relentlessly and it seemed everyday that somebody was flipping a property for a big profit and brokerage commission even before they had gone to settlement. It was so easy; we all had keys to the castle. Many brokers and investors made big money by just showing up and playing the game. So here we sit today licking our bruised wounded egos and reflecting and asking where we go from here. I find this from Roger Staubach, former chairman and CEO of the Staubach Company, very fitting for the challenges our industry and ourselves face today.
“To me success is being able to feel good about how you’ve done things. You have to have balance in your life. You can’t think only about ‘what’s in it for me?’ You have to give back and ask for help and say you’re sorry and contribute to the success of others. And you can never give up. Athletics taught me that. You must work hard, prepare, learn from your losses and continue to fight until the very end.”
It’s very true we don’t know how long this cycle will last and we probably haven’t reached the lowest point yet. But I can tell you that it’s always darkest before the dawn.
Friday, February 13, 2009
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
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
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