• Net Lease Market Strong
  • November 24, 2016 | Author: David H. Gunning
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • According to the Brokers out in the Net Lease market, the stable and consistent returns of net-lease investments continue to drive investor demand. In turn, this is compressing cap rates in the sector to levels that not have been seen in years. Single Tenant net-lease retail remains the most popular segment with investors. Cap rates for net-lease retail properties dropped eight basis point in Q3 to a record low of 6.1 percent. Office and industrial cap rates plunged further - 17 and 12 bps, respectfully, to 7.08 percent for office and 7.14 percent for industrial. Further driving investor demand is a combination of uncertainty in traditional investment asset classes and a lack of new construction properties with long-term leases. Q4 outlook looks good, especially if you are seller.

    There are a couple of things to worry about, however, overall:

    (1) The Regulators putting the squeeze on the Banks

    Regulators remember that little income was generated during the post-market collapse and are now applying tighter restrictions on lending, making no distinction between asset class, and being extra strict on lending classes with no cash flow. This is hard for banks because they’ve always focused on short-term lending. Developers looking for debt for construction and gut rehabs, in particular, are finding an extremely compressed lending landscape.

    (2) The great divide Between Equity and Debt Capacity

    Low debt keeps the market happy, and while prices are rising and falling, real estate with that cash flow well are selling for amazing prices. There is a tremendous amount in unfunded real estate commitments, which is increasing the divide between equity and debt capacity.