We’re closing out the first quarter of 2017 and expectations on both sides of the table are set. With the new administration, sellers believe that even with a slight uptick in interest rates, they will still be able to garner the fantastically low cap rates we have been achieving for the last several years. Conversely, buyers are of the mindset the needle will start to point in their favor as the increasing interest rates will continue to push cap rates, providing an advantage at the negotiating table. Ultimately, what we are seeing in the net lease market is a stalemate.
Having worked in the real estate sector over the last twelve years, I have always believed we could use data to illustrate patterns, rely on market knowledge and insight to identify current trends, and together, discern a general prediction of how the markets would turn. The net lease markets over the past six months have led me to throw that philosophy out the window. As you talk with most anyone within the net lease industry, you will find no common thread regarding the future of the market place. Even with the latest hike in interest rates, there still seems to be a thick fog with no clear path in site.
Since the beginning of the new year, nothing is as it seems. Most offers received on current inventory range anywhere from 50 to 100 bps above asking price. The inventory is still great, but the current offering process is much different from where things were a year ago. On the flipside – sellers are determined to obtain the returns that were being seen not even six months ago; with no clear indication that the market should be shifting in the opposite direction. It isn’t as though interest rates have climbed to a number that is unreasonable. It isn’t as though any significant laws have passed to threaten the 1031 process for better or worse. So what gives? What will it take to bring everything back into focus again, and make the moves we all need to make seem clear again?
My advice to buyers? Realize that although interest rates have crept up, the macroeconomic outlook of US-based investments as a whole hasn’t changed in such a significant manner that warrants offers so far above asking. Making the seller feel as though they are being forced into a fire sale will work in no one’s favor. And to sellers? You must notice that the market is changing and you must make room for some change. Interest rates have gone up and will continue to do so. For every property that sits on the market with no budge in the sales price, five more properties will pop up and take its place. Eventually, inventory grows to a point that sellers will be forced into accepting even lower offers as the imbalance of supply and demand takes place.
Whether the market fog lifts or settles in for the duration, one fact remains clear. Net lease investing has historically been, and will remain, a solid investment outlet. Once the gap between buyers and sellers narrows, the 2017 investment market should begin to see growth along with a solid stabilization of cap rates.