The market for single-tenant net lease retail properties had a steady year in 2016, despite some hesitation related to world, economic and political events. Entering 2017, investment sales brokers are seeing a lot of demand from exchange buyers and a variety of properties coming to market. For the first time in a long stretch, cap rates have adjusted slightly. That, in turn, has caused supply — tight for many years — to loosen slightly and make more desirable properties more attainable for some buyers. On the sell side, some large institutions are balancing their portfolios by shedding some properties so rents from similar retail categories are proportional and numbers are working to their advantage, creating some supply in the market. At the same time, they are keeping their eyes open for portfolios and assets that they desire to grow their returns.
Many investment brokers and buyers say the market still favors the sell side, but it was more even-keeled in 2016, tempered by lulls in activity throughout the year. The rising interest rate environment toward the end of the year — the 10- year Treasury rate rose steadily after the election in November and the Federal Reserve Bank voted to raise interest rates in mid-December — has also tempered many buyers who must place debt on new acquisitions. Brokers and buyers agree that the outlook is favorable for 2017, with many forecasting a year similar to 2016 for the sector. For this article, SCB spoke to more than 15 investment sales brokers and buyers active in the single-tenant net lease sector, to get a pulse on the industry.
SUPPLY AND DEMAND
For the first time in a number of years, sources active in the single-tenant net lease industry are reporting that supply is better than it has been in recent years. Some report the supply situation is better because the gap between buyer and seller expectations was wider in 2016. Among the most active buyers in the market have been 1031 exchange buyers — those that have sold other properties and are seeking to defer capital gains taxes by placing their proceeds in a similar asset. Most of these buyers, report sources, are selling multifamily assets and trading to less management-intensive properties like single- tenant net lease retail assets.
There are certain property types, like multifamily, that are moving at aggressive cap rates, which are forcing people to look into doing 1031 exchanges,” says Jonathan Hipp, CEO of Calkain Cos. “Net lease properties line up well with 1031s.”