CPN - September 2008 - (Page 21) INDUSTRY PULSE NET LEASE Bottleneck The crunched property-debt environment has sharply slowed net lease investment and put downward pressure on property values. Tougher financing terms are prompting wouldbe buyers to demand higher yields, but owners have been slow to accept the revised valuation reality. However, Boulder Group president Randy Blankstein reported that cap rates are pushing upward at least moderately. For newer net-leased retail properties—a key sector bellwether— cap rates climbed an average of 25 basis points during the first half of 2008, putting yields today mostly in the middle- to high-7 percent vicinity. That is pretty much on par with current cap rates for industrial and office properties, all of them headed toward the historic norm of higher than 8 percent. Under prevailing mortgage rates and terms, leveraged buyers need the higher cap rates to generate the same cash-on-cash yields they were achieving early last year, noted Stan Johnson Co. senior director Darren Sides. A buyer striving to maximize leverage would need to buy at an 8 percent cap rate to obtain the same cash-oncash return—around 7.75 percent—that investors could typically count on at a 7 percent cap rate in early 2007, he calculated. That is because available leverage in many instances has fallen from 80 percent to 65 percent, debt costs have risen from 5.5 percent to 6.5 percent, and maximum amortization has dropped from 30 years to 25. With so many owners refusing to drop prices to 8 percent cap rates, transaction volume during the second quarter came in at only half the level of a year earlier, according to Boulder research. Fewer than 6,250 U.S. net lease properties traded, compared with a quarterly average exceeding 10,500 during the hyperactive pre-crunch period from the middle of 2006 through the third quarter of 2007. And the roster of properties being actively marketed fell another 6.8 percent during the second quarter, to about 19,500, the shortest list in two years. Another factor slowing activity: Many financially capable investors are expecting values to fall further in coming quarters, noted Bricks & Mortar Capital president Craig Silvers. “We’re seeing no signs that the market is going to snap back, so it can pay to wait.” vides the net lease experience and deal-sourcing capabilities. The fund just passed its 50 percent placement level and should be entirely invested by the end of the year. Its latest acquisition: a 261,700-squarefoot industrial building in Allen, Texas, net leased to electronics- manufacturer Sanmina-SCI Corp. Other formidable teams have also found ways to circumvent market difficulties, actively pursuing myriad strategies in the net lease marketplace. Recently formed ventures are employing such strategies as buildto-suit developments, sale-leasebacks with specific business types and acquisitions of specialized net lease properties. And while immediate access to deal-closing equity is the key driver of their financial strategies,these ventures take widely varying approaches to leverage. While Boulder and ORIX do not EXCEEDING EXPECTATIONS. SURPASSING THE COMPETITION. WWW.C WC AP I TA L .CO M For more information or to discuss your specific financing needs, contact: TAMMY HEYMAN | SENIOR MANAGING DIRECTOR | CAPITAL MARKETS | 646.253.8827 | THEYMAN @ CWCAPITAL.COM www.cpnonline.com • September 2008 • COMMERCIAL PROPERTY NEWS 21 http://WWW.CWCAPITAL.COM http://www.cpnonline.com
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.