Single-Tenant Net Lease is Sector Darling

IRVINE, CA—Investors are seeking single-tenant net-lease deals like never before, Matt Mousavi, senior managing director of Faris Lee Investments, tells We spoke with Mousavi about why STNL transactions are so prevalent, who the investors are and the future of multi-tenant investment. Matt, you are doing a high volume of single-tenant retail property deals across the country. Who is buying this type of product and why?
Mousavi: In the last 24 months, we’ve sold in excess of 257 net-lease properties in 41 states. Net lease was transformed through the recession into a newly respected and highly viable asset class. It “came into its own,” so to speak. Now we see it in both the public and private sectors—it’s a hot segment. There are several reasons for the increased demand and transaction volume.
During the recession, we all witnessed extreme volatility in the markets. Everything crashed, and people began seeking alternate investments offering passive cash flow and a decent yield. In their search, private investors discovered they can generate a 6% or 7% yield for CVS triple-net leases, for example. It’s a passive investment, since in many cases the tenant is responsible for of all the expenses, and it’s substantially more attractive than the .2% they would get from their CD or money market. Suddenly we began to see a huge influx of first time investors in the net lease market and a high incidence of 1031 Exchange buyers, along with repeat net lease investors.
Public and private REITs have been, and continue to be, active investors in single-tenant investments. Through the recession, REITs began aggregating more capital to deploy into passive, long-term net-lease investments, on a much larger scale. The consolidation within this sector, coupled with the increase in allocations from a wide range of institutional investors, has been a major driver for our firm's transaction volume, and that of the sector in general.
As a California-based company, we are assisting our clients based in California in placing capital out of state. Compared to California, known to be one of the highest-priced real estate markets in the country, out-of-state markets are attractive to California-based investors. It’s the same lease structure as they would find in California, but with a more attractive yield. A Walgreens with a 20-year triple-net lease can be owned from anywhere, because in most cases the tenant pays the taxes and maintains the property. It is more difficult to remotely own a multi-tenant property where a more hands on approach is required either from the ownership or a management company. When you own a NNN investment, you don’t even have to be in the same country.
The same is true with foreign investors deploying capital into assets throughout the US. We have been actively placing capital for foreign investment companies, both public and private, as well as foreign private investors. In particular, investors from China, South Korea and South America have been active in the net lease market. Most view the US as a safe haven for security and stable returns, and now via the net leased investment, they can realize their goal of owning real estate in the US with very little management. These investors understand the value and passive ownership of net lease investments, and they gravitate toward brands with which they’re familiar. Are cap rates compressing in all geographic regions for single-tenant product?
Mousavi: Yes, we’re seeing compression across the board in core markets and gateway regions such as Southern California, the Bay Area and New York. But even tertiary markets are compressing, mainly due to the demand/supply dynamic. There’s a limited supply of net lease product, both in terms of existing assets and new developments, and there is continued demand from all sides—domestic, foreign, public and private. All have led to increased values and compressing cap rates. What trends do you see happening with the retail-property market over the next six to 12 months?
Mousavi: In investment sales of single-tenant property, we will continue to see strong demand and limited supply. We need new supply, and we’re starting to see some development, which is a positive, albeit not nearly at a pace to keep up with current demand. There are some investors out there who see rising interest rates as a positive as this could potentially lift cap rates, and “stir the pot.” Although we do see an environment in the future with higher interest rates, the timing is unknown and difficult to predict. Also, many of these net leased sales occur on an all-cash basis, and we're already trading these at cap rates that would result in negative leverage if financed. So we actually don't foresee a major increase in cap rates in the net leased sector, particularly in assets below $10 million, if interest rates begin to rise.


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