“Money (resources + market intelligence) Talks, BS (broker/salesman hyperbole) Walks!”
This has been one helluva year for real estate investors who have been seeking risk-adjusted returns in the net lease sector just this past week, we received a call from a seasoned NYC investor inquiring whether a particular investment grade asset with a shorter term lease priced at $5,274,000 or a 7.5% cap could be bought at an 8.25% cap, all cash/short due diligence/quick closing of escrow. We respectfully responded, “this would have been a real conversation/negotiation with the seller, if it was taking place in Q4 2009; not Q4 2010.” What a difference a year can make.
While we were trained in the “everything is negotiable” market psychology and real estate practice, we submit that there needs to be a practical real-time market condition rather than battling egos or some mythologies about the NNN market pricing informed by internet listings. We have a seasoned approach combined with current market intelligence that has allowed us to outperform the market on a consistent basis for 30+ years in many major markets around the country.
Nonetheless, in the last six months, we have tendered a number of “all cash, full asking price” offers in this new 2010 world order of cap rate compression in low-mid 6 caps only to find ourselves and our clients in an auction environment.
This did not happen once or twice, but no less than twenty-four times in dealing with sellers’ reps, listing brokers, and direct deals with sellers. What a sobering reality for buyers and an unanticipated windfall for sellers.
We encountered sellers and their brokers attempting to sell NNN assets in Q3 and Q4 2010 based on the NOI of 2013 with the next rental bump included. In one case they graciously offered to provide a rental income credit of the $16,000 annual rent disparity for the three (3) years amounting to a $48,000 seller’s credit off the price.
At the very same time they were attempting to charge our investor/buyers a low 6 cap rate based on the 2013 NOI which jacked up the pricing by $320,000. “Nonsense on the face of it”, you might say. Oh no, they were sold on that basis to another retail buyer who presumably had other broker representation and able counsel.
“Absolutely nuts” from our perspective!
So, now more than ever, a keen sense of the market and deal-making skills that calibrate where a deal can be secured on a range of terms in addition to the new pricing metrics discussed above, is how we add value.
Our net lease advisory practice is based in Los Angeles but national in scope and as is our client base. We have spent years attempting to provide the most accurate and credible market intelligence to our prospective clients. We do not play favorites with sellers or listing brokers. Instead we present our Best-of-NNN-Breed candidates that match our investor/buyers’ client-specific criteria and objectives. While we are highly attuned to sellers’ objectives, our loyalty and fiduciary responsibility is with the investor/buyer, as we define it. We disclose all known data points and fees in a transparent manner with our investor/buyers and valued net lease brokers.
As we have for many years, we recently attended Net Lease Conference in New York. This is an annual event at which the would-be Brahmans of Net Lease Sector assemble to confer and do deals. It was noteworthy to us that many retail investors had come out of the shadows if they could secure a 7% coupon on net lease assets of varying shapes and sizes. Current yield was king as an alternate to money market accounts and bond-type investments. Closing deals that actually require an exit strategy were very difficult to reconcile in the current market.
We observed that a number of net lease acquisition funds that have been prominent in the acquisition arena have been financed with short term“IO debt to achieve these 7%+/- returns due to cap rate compression and accessible debt. Other debt structures at low rates have aided the cap rate compression as well.
So, where do we go from here? What will be the impact on real estate valuations and debt availability of the Fed’s QE2? Will there be new waves of commercial foreclosures for underperforming assets in the next year? Is it safe to come out of the shadows to acquire new assets or re-balance your portfolios? Yes, but with sound and credible data to guide you.
Your ability to secure stable and predictable income streams that outperform alternate investments can in fact be achieved in the net lease sector. It requires a sober and sanguine study of real time options and competitive market conditions. Our 60,000+ data base of net leased assets allows us to add value to our clients’ investment decisions by providing common sense, tried and true real estate investment principles.
