Investors looking for net lease properties received a gift during the second quarter of this year: The number of these properties hitting the market soared.
This is especially good timing for REJournals’ fourth annual Net Lease Summit, to be held July 26 at the University Club of Chicago at 76 E. Monroe St. in downtown Chicago. There is still time to reserve a spot at this conference, which will bring together the biggest names in the net lease, sale leaseback and 1031 exchange markets.
The number of net lease properties now for sale will certainly be addressed during the summit. Wilmette, Illinois-based The Boulder Group, in its Second Quarter National Net Lease Report, said that the number of net lease retail properties for sale increased more than 13.6 percent in the second quarter. In all, there were 4,216 net lease retail properties on the market across the nation.
The news was similar for the office sector: Net lease office properties for sale increased 12.1 percent to 538 properties.
Only in the industrial sector did the number of net lease properties on the market take a dip. The Boulder Group reported a decline of 9.77 percent in this sector.
Overall, though, the total number of net lease properties for sale in the second quarter increased 11 percent.
Randy Blankstein, president of The Boulder Group and a featured speaker at the Net Lease Summit, said that the increase in supply was the most noteworthy result from his company’s report.
“When supply increases, there is a reason behind it,” Blankstein said. “Most people think that interest rates are going to go up. Cap rates won’t be that far behind them. Sellers are looking to sell their assets before cap rates increase even further.”
Blankstein said that this increased supply, then, is an early indicator that cap rates in the net lease space will rise.
“They won’t necessarily go that much higher, but they certainly will be higher by the end of the year,” Blankstein said.
David Piasecki, chief investment officer with ElmTree Funds in St. Louis, and another speaker at the summit, said that he expects plenty of interest from investors in the net lease space, especially when it comes to industrial.
That’s because industrial real estate, whether in the form of single-tenant net lease or sprawling spec buildings designed for multiple tenants, remains in demand from companies constantly trying to get their products to their customers in less time.
“Industrial real estate is the hottest aspect of commercial real estate right now,” Piasecki said. “It is drawing all types of investor interest. It had always been the sort of quiet backwater of commercial real estate. But right now, it is the most popular asset class for investors.”
Piasecki points to ecommerce as the driver for this asset class. Companies need logistics systems that allow them to transport their goods quicker and cheaper.
And the pressure to deliver products is only increasing, which means that activity in the industrial sector won’t be slowing anytime soon.
“Delivery times used to be three days. Now it’s one day,” Piasecki said. “It won’t be long before customers demand their products on the same day they order them. That has resulted in a very significant build-out of industrial real estate in all stages of the supply chain.”
Blankstein agrees. He said that demand for new industrial space isn’t about to slow.
“There is still this gigantic shift that is occurring,” Blankstein said. “A lot retailers just don’t have the distribution network they would like. Their expansion plans for these networks will be robust during the next few years. I don’t think industrial will be slowing down anytime soon.”
Piasecki said that industrial real estate satisfies the “mission-critical” aspect that ElmTree looks at when determining which net lease properties have the most potential to perform well.
What is this? Piasecki considers a net lease property to be mission-critical when it will still be needed years in the future. He points to office and industrial uses as examples. No one really knows how office spaces will change 10 to 15 years from now.
But industrial space? Companies will always need that. That makes industrial net lease properties more mission-critical, and usually safer investments.
“There will always be a need for industrial,” Piasecki said. “There always has to be industrial space somewhere along the supply chain. This type of real estate also has more flexibility. You can take an 800,000-square-foot box and easily turn it into four 200,000-square-foot spaces. The nature of industrial real estate lends itself to more flexibility.”
Another strong net lease sector? Both Blankstein and Piasecki pointed to healthcare.
This isn’t a surprise. The U.S. population continues to age, and its residents need access to more medical care. At the same time, more consumers are reluctant to travel to sprawling hospital campuses. They want to receive their care at smaller facilities located near them.
This trend benefits the net lease sector, as spaces in retail strip centers increasingly become home to medical uses.
“We call it the retailization of healthcare,” Piasecki said. “It is a diffusion of real estate needs that were at one time clustered around the city in large campuses, in full-service hospitals. All outpatient spaces were clustered around the mothership of the main hospital. We are now seeing those services, the outpatient centers, the urgent care facilities, being diffused where the people are. People don’t want to travel far to access healthcare.”
Blankstein said that he is seeing an increasing amount of retail space being transformed into healthcare uses. Dialysis centers, for instance, are popping up in spaces that formerly housed retail uses, he said. Satellite offices of larger hospitals are doing the same.
“Not as many people want to go to hospitals for medical services that aren’t quite as important,” Blankstein said. “People want to go to closer locations. They want more convenient medical services. Healthcare providers, then, are moving away from larger hospital campuses and toward these smaller, retail-type locations.”
Not all net lease sectors are a performing as well as industrial or healthcare today, of course. Consider retail. There have been plenty of headlines bemoaning the number of brick-and-mortar retail stores closing today.
But Blankstein said the news isn’t all gloomy for this sector. Some retailers are surviving because they provide something customers can’t simply order online. Restaurants, gas stations and fitness clubs are three examples.
Other retailers are competing with online sales by making their stores more desirable, Blankstein said. They are shifting floor plans and adding customer service and amenities designed to draw customers away from their computers and into their stores.
Look at the number of drugstores that now offer onsite medical clinics. These clinics might bring in customers who then, maybe even on a whim, spend a few extra dollars at the store before leaving.
“Retailers are coming up with more reasons to draw you in,” Blankstein said.
And the difficulties that big malls are facing? They might benefit the retail side of the net lease business, Blankstein said.
Many retailers are leaving sprawling, enclosed malls and opening new freestanding stores with better locations.
“You are seeing a lot of pressure on enclosed malls,” Blankstein said. “The tenants in these are finding a lot of success in freestanding stores. They realize that you don’t have to be in an enclosed mall. You get more traffic and better visibility with street-level retail.”
Interested in hearing more about the net lease market? Then click here to reserve a spot at REJournals’ fourth annual Net Lease Summit.