{"id":1004129392,"date":"2015-10-14T06:42:57","date_gmt":"2015-10-14T14:42:57","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004129392"},"modified":"2020-04-22T23:02:25","modified_gmt":"2020-04-23T07:02:25","slug":"october-issue-finance-investment-builders-bonanza","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/october-issue-finance-investment-builders-bonanza\/","title":{"rendered":"October Issue: Finance & Investment\u2014Builders’ Bonanza"},"content":{"rendered":"

By Poonkulali Thangavelu, Contributing Writer<\/em><\/p>\n

Fueled by the broader economic comeback and readily available financing, net-lease construction activity has picked up considerably in recent years. \u201cGenerally speaking, we\u2019ve seen a good level of new construction activity on all fronts,\u201d said Jeff Hughes, a managing director at Tulsa, Okla.-based Stan Johnson Co<\/a>. \u201cWith the capital markets dislocation that occurred in 2008, we saw corporate America really hit the brakes on new construction. They held off on many strategic moves. \u201cBut as we\u2019ve weathered that storm, the last few years we\u2019ve seen a substantial pickup in new construction in the single-tenant space.\u201d<\/p>\n

To underscore Hughes\u2019 point, more than 40 million square feet of single-tenant retail, industrial and office space \"sunbelt<\/a>was delivered nationwide during the second quarter, according to Stan Johnson Co. research. The Southeast accounted for 11 million square feet of the total, led by 7.8 million square feet of industrial product. Four out of the five states with the most net-lease inventory under construction are in the Sunbelt: California, Nevada, Texas and Georgia.<\/p>\n

The rest of the country is represented only by Ohio, with its 5.6 million-square-foot construction.
\nIn comparison to the 2005-2008 market peak, construction activity in the current cycle tends to be less speculative. Also of note, industrial development is well ahead of the office and retail sectors. At midyear, 90.3 million square feet of net-lease industrial space was under construction, nearly twice as much as the combined total of single-tenant office (34.3 million) and retail projects (15.5 million).<\/p>\n

\u201cOnline retailers as a whole are driving a lot of construction within the net-lease industrial sector,\u201d observed Randy Blankstein, president of Northbrook, Ill.-based Boulder Group<\/a>. This trend coincides with the much-discussed needs of Amazon and other online retailers for a vast quantity of distribution space. Earlier this year, for example, Amazon opened a 1 million-square-foot fulfillment center in Kenosha, Wis. Such facilities are in greatest demand to serve densely populated downtown areas, Blankstein pointed out.<\/p>\n

Lenders Leap In<\/strong>
\n\"in<\/a>Fueling the current wave of net-lease development is the availability of funding from a variety of sources. The attractive characteristics of the single-tenant space, such as the bond-like income stream flowing from long-term leases, provides strong incentives for lenders. \u201cIf the tenant is considered investment-grade, and the term of the lease is 10 years and above, there is plenty of construction financing at very attractive pricing,\u201d explained Jonathan Hipp, president & CEO of Herndon, Va.-based Calkain Cos<\/a>. \u201cNot to say that there is no financing available for non-credit tenants. It\u2019s just a limited number of lenders.\u201d The list of favored tenants includes those with credit ratings of BBB or higher.<\/p>\n

Lenders lining up to supply capital include local, regional and national banks, as well as insurance companies. Mezzanine financing is also available from private equity sources and institutional investors. \u201cWe see developers use that source of capital pretty frequently,\u201d Hughes reported. \u201cIt is a decent way to bridge the gap between construction debt that\u2019s available and the total project cost. It\u2019s a growing slice of the capital stack.\u201d Financing in the 70 to 80 percent loan-to-cost range is available, with interest rates around 3 percent. Mezzanine financing can further improve that leverage.<\/p>\n

Flexibility carries weight with lenders, too. \u201cIt has to be multi-use, a box like a Dollar General, for example,\u201d explained Farhan Kabani, a vice president at Mark One Capital<\/a>, a Dallas-based Marcus & Milllichap affiliate. \u201cIt\u2019s just a box and you can easily convert it\u201d in case the tenant bows out during construction. \u201cI would say that those are probably more attractive to lenders than, say, a specialized restaurant or gas station.\u201d<\/p>\n

Tenants Take the Wheel<\/strong>
\nAs the market shifts towards in favor of tenants, they have more leverage. While triple-net terms are still standard, leases are more likely to offer tenants more flexibility. As a result, tenants can often negotiate commitments of 10 or 15 years, rather than 20 years.\u00a0Annual rent escalations are more modest, as well\u20141 to 1.5 percent, down from 2 percent. In particular, large credit tenants have the muscle to negotiate flatter leases.
\nCap rate compression has also influenced the single-tenant sector for several years. Retail cap rates averaged about 6 percent in the second quarter, according to Stan Johnson Co. Compression, in turn, has boosted property values.<\/p>\n

If\u2014or when\u2014the Federal Reserve starts raising interest rates, the increases will probably be priced into cap rates as well. Even then, market participants expect that supply-demand dynamics will continue to attract financing to net-lease properties. This means that a hike in interest rates may not immediately nudge net-lease cap rates upwards, as investors could be willing to trade more moderate returns for continued exposure in this high-performance niche.<\/p>\n","protected":false},"excerpt":{"rendered":"

Lenders reveal why they love net-lease construction.<\/p>\n","protected":false},"author":1219,"featured_media":1004129396,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1521,21825,22251,21783],"tags":[],"class_list":["post-1004129392","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-digital","category-finance","category-in-focus","category-investment"],"acf":[],"yoast_head":"\nOctober Issue: Finance & Investment\u2014Builders' Bonanza - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/october-issue-finance-investment-builders-bonanza\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"October Issue: Finance & Investment\u2014Builders' Bonanza\" \/>\n<meta property=\"og:description\" content=\"Lenders reveal why they love net-lease construction.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/october-issue-finance-investment-builders-bonanza\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2015-10-14T14:42:57+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-04-23T07:02:25+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/10\/sunbelt-leaders.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"497\" \/>\n\t<meta property=\"og:image:height\" content=\"437\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Poonkulali Thangavelu\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/october-issue-finance-investment-builders-bonanza\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/october-issue-finance-investment-builders-bonanza\/\",\"name\":\"October Issue: Finance & Investment\u2014Builders' Bonanza - 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