Even though triple net leases and direct investments in real estate, as well as REITs, were affected by the 2007 recession, REITs and corporate stocks took a much bigger hit while having generated less return in the years prior to the economic downturn. The U.S. economy is still recovering from the recession and will most likely remain in this state for another year or so, while cap rates are expected to rise and revert to their healthy and sustainable median values.
Researchers agree that the recent recession was caused by “the collapse of the housing market and the resulting sub-prime mortgage crisis that led to bank failures in the US and Europe.” Businesses had a difficult time obtaining credit for real estate acquisitions, refinancing, or new developments. Record high oil prices are also quoted as a reason for the worldwide economic downturn. The impact of this international recession could be seen in the stock-, as well as the real estate markets. As the liquidity crisis forced many businesses to sell part of their real estate portfolios, the situation worsened due to the already saturated real estate market being flooded with many more properties that had to be foreclosed or sold at sometimes half their prior values.
After a consistent five-year decline, cap rates immediately adjusted towards the end of 2007, when it was clear that a recessionary period was about to begin. As with other recessions in the past, cap rates shot upwards and were expected to level out just north of the 7.6% range, the historical average. Generally, the real estate market lags the economy; but when the most recent recession started in 2007, cap rates hovered around 7% and did not begin to drastically spike up until November 2008, almost a year after the recession began. Cap rates continued to rise to 8.1% in October 2009, past the official June 2009 ending date of the recession, and then started to gradually revert back to 7% in the last quarter of 2011.
For investors with a preference for relatively safe and profitable long-term investments, direct investment in real estate presents itself as the best option. It offers a typically a long-term investment and a predictable stream of income. Triple-net leases in particular provide a stream of annual income with minimum landlord involvement required.
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