C — January 31 - February 13, 2014 — Shopping Centers — Mid Atlantic Real Estate Journal
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M id A tlantic ICSC C onference & D eal M aking By Andrew Fallon, managing director, Calkain Companies Net lease in the new year – trends to watch in 2014
N et lease properties have become a substantial allocation of real es-
and market conditions in the new year. As Calkain evaluates potential market changes in 2014, there are a few notable trends worth discussing that may impact investment strat- egy, opportunities, and transac- tion volume. Interest Rates Impact on Capital Decisions Given the positive correlation between interest rates and cap rates it’s not surprising that we witnessed increased sales volume and significant cap rate compression from 2011 - 2013, when the 10-yr Treasury Yield dropped from above 3% to sub- 2% in mid-2013. The second
half of 2013 saw an uptick in interest rates based on the improving economy and the Fed’s decision to scale back its bond buying program; the 10- yr Treasury Yield was 2.9% in December 2013, up 100 basis points from January 2013. As of January 23, 2014, the 10-yr Treasury Yield was back down to 2.79%, and it’s that volatility that will be impacting capital decisions for buyers, sellers, and long-term investors. Calkain’s Director of Capital Markets, Jon Florin, has wit- nessed the market’s response as more owners are proactively refinancing in order to lock
long-term rates before they climb higher. Similarly, buyers have increasingly explored lon- ger term (7, 10, and 15 year) ac- quisition financing as opposed to the traditional 5-year loans. We expect interest rate trends to have a substantial impact on strategic financing and the tim- ing of buy-sell decisions as long as the volatility and the fear of rising interest rates impacts investor psychology Stabilization of Cap Rates, Imbalance of Supply & Demand Although interest rates are trending higher, net lease prop- erties continue to hold values
at historically low cap rates. A recent survey indicated that a majority of market participants expect upward pressure on cap rates in 2014. However, that upward pressure will likely be off-set by the imbalance of supply and demand, given that new development has been limited since the recession while demand has never been greater. Fueled by a flight to quality and access to capital, private investors are attracted to these passive, creditworthy, income-producing assets. Com- pounding the imbalance of sup- ply and demand has been the institutionalization of the net lease marketplace as public and private REITs have been rais- ing enormous amounts capital and acquiring large portfolios. Many REITs have been active with mergers and acquisitions, in order to gain market share and increase their overall mar- ket cap. According to CoStar, publicly traded net lease REITs now have a combined market capitalization of $40 Billion. The competitive demand for net lease properties has stabilized cap rates, despite the fluctuating interest rate environment. Market velocity and transaction volume will continue to trend positively as long as level expectations are maintained between buyers and sellers. Calkain is closely watching bid-ask spreads and monitoring trends so that our clients can be prepared to take advantage of incremental mar- ket movements. Strategic Search for Value Opportunities In a highly competitive and compressed cap rate environ- ment, it becomes more chal- lenging to find value opportu- nities. Many investors have shown a willingness to invest in secondary and tertiary mar- kets, which can provide higher yields without significant credit risk. Alternatively, other in- vestors prefer higher yields based on credit risk associated with franchisee and personal guarantees. When sacrificing credit or location, it’s critical to understand and underwrite the market fundamentals, includ- ing rent-to-market and rent- to-sales ratios to determine the viability of the investment. An increasingly popular val- ue-add strategy has been based on identifying well-located properties with short lease terms remaining. Rather than Continued on page 13C
tate portfolios and one of the most highly t r an s a c t e d asset classes in terms of volume and velocity. Over the past two year s a l one ,
Andrew Fallon
Calkain has completed 327 net lease transactions, including portfolio and single asset sales. As the economy continues to improve, we have been consult- ing our clients on opportunities
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