Net Lease Q&A: NNN’s Chief on Leaving Grubb & Ellis

At the end of this week, Tony Thompson, chairman of real estate giant Grubb & Ellis Co., will step down from that position. He will not, however, be any less of a pioneer in the net lease, 1031 exchange and TIC industries. In 1998 Thompson formed Triple Net Properties L.L.C. He oversaw the company’s growth over the next decade, culminating in the 2006 reorganization of Triple Net and NNN Capital Corp. to form NNN Realty Advisors Inc., which merged with Grubb & Ellis late last year. Thompson took the Grubb & Ellis helm at that time. Thompson remains a major stockholder in Grubb & Ellis, but hasn’t committed himself to further activity in real estate. Still, it would probably be a good bet to see him emerge as an active player in the industry in the not-too-distant future. As he put it, “I’m talking to a lot of people now, and listening to a lot of ideas.” CPN: How did you get into the net lease business? Thompson: Partly by design, partly by trial and error. More specifically, there was a tremendous number of passive investors coming through the pipeline back then, many of them baby boomers looking for investments in which not a lot of management was required. We wanted to be the dominant player in the 1031 exchange market, so it was an easy decision to offer single-tenant, triple-net properties to our clients. CPN: What’s ahead for net lease? Thompson: It’s a multibillion-dollar industry, and unless there are no loans at all it will continue to be so, and I can’t imagine that debt won’t be available – it’s just that the playing field is going to different. The price of the debt will be matched with the cap rate of the property, and the quality of the income stream. Those are matches that the industry does very well most of the time. Maybe the industry will shrink somewhat in terms of overall volume, but from past experience, it’s clear that the strong will survive. Grubb & Ellis, for instance, will gain market share going forward, even during the period when the industry shrinks. CPN: Is there still a disconnect between buyers’ and sellers’ expectations in net lease deals? Thompson: There’s always an adjustment period for the expectations of sellers and the reality of what buyers will pay, and it’s always a slow change. But change it will. I’ve seen cap rates move up since August, and I don’t see that changing. Cap rates will end up higher at the end of 2008 than the beginning.