Browse Tag: Net lease

Single-Tenant Industrial Assets: Lower Cap Rates Get A Higher Estimation

A pair of Chicago-based brokerages have reported that all-time lows in cap rates for net leased industrial properties are a harbinger of greater demand for the property class.  In its Net Lease Market Report for Q1 2016, net lease commercial real estate firm Boulder Group has identified the see-saw linking low cap rates top high price points for net lease single-tenant industrial properties.  From the report, authored by Boulder VP John Feeney:

Cap rates in the first quarter of 2016 for the single tenant net lease retail and industrial sectors reached a new historic low rate of 6.18% and 7.10% respectively. During the same timeframe, cap rates for the office sector increased by 20 basis points to a cap rate of 7.20%. Cap rates for retail assets continue to decline and trade at much lower cap rates than that of net lease office and industrial properties due to their preference amongst private and 1031 buyers. Private and 1031 investors typically pay lower cap rates than institutional investors, especially for retail assets. Private and 1031 buyers are more familiar with retail tenants, prefer the lower price points and understand the general business practices of these tenants when compared to industrial or office tenants […]

After the decision was made in the December Federal Reserve meeting to raise key interest rates, the 10 Year Treasury plummeted to its lowest point since February of 2015. Since that time, the 10 Year Treasury has trended upward, however remained lower than its sudden increase prior to the Federal Reserve’s decision to increase rates in December 2015. The net lease market is expected to remain active in 2016 as investor demand and allocated capital for this asset class remains strong. With the volatility of the 10 Year Treasury effecting capital markets, investors will be monitoring the capital markets and adjusting their bids accordingly. 1031 and private investors will be less effected by the volatility of the financing markets than institutional investors. This can be attributed to their acceptance of lower returns when financing or all cash closings due to their 1031 timing and tax consequences.

A NREIOnline post shows the same trend from a different perspective, that of investment sales company Stan Johnson Co. 

Stan Johnson reports that the average cap rate for the entire net lease market fell to 5.79 percent in the first quarter, from 6.24 percent over the past 12 months. The average price per sq. ft. went up about 10 percent, to $169.

The overall supply of product in the net lease sector declined by 3.0 percent since the fourth quarter of 2015, The Boulder Group reports, as new construction has remained limited.

“New construction properties are in the highest demand amongst 1031 and private buyers as they typically have the longest lease term,” the firm’s researchers write. “The limited supply has kept cap rates low for all three sectors despite the volatility in the 10-year treasury over the past year.”

Download a complete copy of NREI’s Net Lease Trends report here.

Commercial Leases: Which Kind Is Right For Your Deal?

Let’s take a quick look at the four most common types of commercial leases: gross, modified gross, triple net, and bond lease. Which one is right for the deal you’re trying to complete?

Gross Lease

Common especially for office buildings, in a gross lease, expenses in the operating category such as trash collection, janitorial, utilities, landscaping or management fees are typically picked up by the landlord.  While operating expenses under a gross lease are often picked up by the landlord, beware of terms such as an expense stop, aka a limit imposed on the amount of such expenses paid by the landlord and that sends any costs over that stop to the tenant.  This “stop” can be calculated in a variety of ways, but often you’ll see terms that use the historical expense profile of the property in previous years (sometimes called “base year”) used as the amount that the landlord will be paying — and no more than that.

Modified Gross Lease

Often this type zeroes in on utilities and janitorial expenses and passes them to the tenant.  This type of lease is often used  for businesses with extreme needs for electrical power or for tenant operations that require direct control and/or exclusive use of HVAC, and so tenants will accept the maintenance costs for HVAC. Expense categories are by no means boilerplate, meaning what constitutes tenant costs vs what constitutes landlord costs are subject to negotiation.  Concepts like CAM (common area maintenance) charges are fungible: they might be broken out into sub-categories for the purpose of isolating costs so that they can be assigned to specific tenants.

Triple Net Lease

In gross leases, the tenant pays its share of operating expenses usually calculated by a “base year” calculation, with payment limited to certain operating costs.  The triple net is where the tenant is on the hook for 100% of operating expense of the tenant’s share of the space. Costs commonly include the big three (aka the “triple” in “triple net”): property taxes, insurance and common area maintenance (CAM). Commonly used in retail centers, the triple net lease can result in lower rent payments but with operating expense charges added in, comparisons to gross leases on comparable properties can result in similar total payments. Sometimes called the “hell or high water” lease, the triple net still usually doesn’t send 100% of building costs toward the tenant: very commonly, the responsibility for rooftop maintenance and the structural integrity of the building are the responsibility of the landlord.

Bond Lease

The most unusual of the four lease types, bond leases go further than triple net in assigning costs to tenants.  The responsibility for maintenance and replacement if necessary, of building systems, roofing, exterior and structural components of the building can be assigned to the tenant under a bond lease, in addition to the obligations under a triple net lease.  Even further, a bond lease can assign to tenant capital expenses and tenant improvement costs. Under a bond lease, if the building falls down, the tenant is likely on the hook for rebuilding it.  Bond leases are typically used for single-tenant properties and situations where financialization of the lease is a priority — the tenant being responsible for nearly everything associated with the property’s operation and continued existence means the lessor’s position is about as liquid as it gets in commercial real estate.

(Reference: SIOR Glossary of Real Estate Terms)

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Retail Expansion Fueling Demand For New Net Lease Assets

Scattered retail expansion in Q2 of this year continued due to low interest rates and persistent consumer demand. Nationally, retailers continue to expand, re-tool their business models and test new markets. This, according to at least one market researcher, has added up to increasing demand for new-construction net lease assets that are in turn commanding premium prices due to the scarcity of these types of opportunities.

Lanie Rea, director of research for Chicago-based Stan Johnson Company, a firm specialized on single-tenant net lease properties,  says in NREI that the Southeast is currently leading the nation in 4 million sq. ft. of net lease new construction in the pipeline. Apart from the West, the remaining regions are holding strong with an roughly 2.5 to 3.5 million sq. ft coming online.

Cap Rates Staying Low

Cap rates in Q2 of 2015 for single-tenant net least retail have remained unchanged at their historically low rate of 6.4 percent, according to research firm The Boulder Group. The boutique investment real estate firm that specializes in single tenant net lease properties reported that the overall supply of net lease assets was up over 20% in Q2 with retail assets leading all real estate sectors at 23 percent.

Reportedly, some of the rapid retail growth is stemming from drugstores, grocery stores, restaurants and discount stores including Dunkin’ Donuts, Walgreens and Dollar General . According to Crittendon Reseach, Inc., a national analysis and forecasting firm also cited aggressive growth in 2015 especially from retailers such as Dick’s Sporting Goods, Aldi, GNC, Advance Auto Parts and others.

According to industry expert Jonathan Hipp, President and CEO of the Calkain Group and author of  “The Little Book of Triple Net Lease Investing”,  the most active states for net lease activity from Q1 of 2015 were 1. California, 2. North Carolina & tied for 3. Florida/Arizona. The figures for Q2 haven’t been published yet, but based on the flurry of retail growth we’re waiting to see where this upward trend leads.

CCIM reports in their July-August 2015 issue of CIRE magazine that many factors including seller hesitation will help to limit the amount of available inventory in the retail net least market.  See here for their synopsis.


Related articles

Research: 1Q 2012 Cap Rates Flat

Boulder Group Chart: Cap rates flat

The Net Lease Market Report from Chicago-based Boulder Group says the asking cap rates around the country are more or less flat versus the previous quarter. Retail sector cap rates rose 3 points, industrial sector cap rates dipped 6 points and office cap rates fell 15 basis points according to the company’s investment research.

Interviewed at Globe Street, Boulder Group President Randy Blankstein said low availability of lease financing was part of the reason why cap rates were flat.

“There just isn’t much core available, it’s a bifurcated market. Investors are going to move into shorter term properties with secondary credit, with higher risk.”

Higher interest rates may already be forcing investors into higher return territory, such as the 10-Year Treasury Rate going up to 2.39% in March. If interest rates continue to increase, cap rate compression could suffer worse than since Q2 2011.

New development will remain limited throughout 2012, he says. “While there may be some new dollar stores and banks, there’s just too much need to fill vacant boxes such as Borders,” Blankstein says.

Long an attraction to investors for their high and steady rates of return against low interest rates, net lease deals provide that the tenant pays not only rent, but a range of costs associated with the property including taxes, maintenance, utilities and others.

Since many net lease players expect the market to slow, the outlook for brokers could mean a return to a more traditional, less securitized commercial property market, constrained both by limited availability of financing and by the turning away of investment capital from such deals.  While cap rates will always vary by location, by expense structure and lease term, don’t be surprised to see reminders that cash — even in commercial real estate — is king.


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