About 175 commercial real estate and net lease investment professionals from across the country gathered July 25 at the University Club of Chicago for REjournals’ and Midwest Real Estate News’ fifth annual Net Lease Summit. The goal? To take a closer look at where the net lease industry stands at the midpoint of the year.
In leading the State of the Market panel and kicking off the event, Randy Blankstein, president and founder of the Boulder Group said, “Extra innings will be a key buzzword of the day as we describe the industry in 2019. The industry continues to outperform expectations and investors maintain their appetite for quality investments.”
Blankstein guided a panel of experts that included Andres Dallal, Executive Director, WP Carey; Gordon Whiting, Head of Net Lease Real Estate, Angelo Gordon; and Aaron Baum, Managing Partner and Cofounder, SAB Capital. Boulder first asked for an assessment of where the market stands and then asked about the leading indicators that characterize the market.
“Debt and equity are plentiful with buyers chasing yield and risk adjusted returns,” said Baum. He attributed the strength of the market to various factors, ranging from a historically low unemployment rate to investors’ focus that avoids Amazon and e-commerce tenants, and the presence of a sophisticated buyer pool.
Gordon characterized 2019 as “an interesting year because of interest rates.” He noted the bifurcation in the market, with many people feeling we’re at the end of the market but many also believing we’re not. Still, Gordon said the market likely will be “status quo,” with demand remaining strong because of what he described as “tremendous capital flows.”
“There are lots of firms with dry powder that needs to be invested,” Gordon added.
Dallal said, “It’s a good time to be a public REIT.” He also noted, “There is more capital than good deals. There are lots we’re passing on, but sometimes you find the good deals.”
The panel addressed some of the greatest challenges in the market.
Baum identified several challenges, including sale leasebacks that haven’t performed well and the struggles to sometime earn expected rent growth. He also pointed to shrinking profitability, particularly in the retail sector, which has translated to retailers taking a more cautious and “lean” approach—not being open on every corner.
The panel agreed that an increased number of buyers in the market is also having an impact, which generally results in upward pressure on sale prices.
For Gordon, one of the greatest challenges in the industry overall lies in structuring good transactions. With an abundance of capital in the market, some terms of transactions are changing, like the premiums typically associated with buying an asset with a shorter-lease term.
“You need to think long and hard about what you’re trying to do,” he said. “It’s important to think like an investor, not a deal guy where there could be a tendency to overpay for the real estate.”
“Buying is as important as selling,” he added.
Dallal echoed those comments, saying that buyers are falling over each other in search of deals.
He agreed that the competition can cause aggressive underwriting and deal structures that will be hard to sustain.
“Rents are not going to grow at 2 percent for the next 10 to 12 years in secondary markets,” he added. He noted that in some cases we “won’t know where the bodies (bad deals) are buried until the market turns.”
Blankstein asked the panel, which included professionals with both retail and industrial insights, about the role and impact of e-commerce on the net lease industry.
“It hasn’t had the same type of effect on Angelo Gordon, because we don’t do a lot of retail,” Gordon said. “But it is impacting everyone, creating opportunities in industrial, especially for last-mile facilities.”
Dallal concurred and added, “It has made industrial the darling investment class.”
Baum said ecommerce is a hot topic, and investors in the retail sector in particular are concerned.
“I see e-commerce as a means for growth. Some brands need to die, and e-commerce fosters that,” Baum said.
With the inevitable turning of the market, whether that be in six months or two years, panelists offered a variety of advice. Gordon advised on the importance of underwriting correctly. “If you are disciplined and in at the right basis, you shouldn’t get hurt.”
In looking ahead, for the balance of 2019 and 2020, Baum said he does not see a free-fall occurring, in part because of the abundance of buyers. He believes we are “in the clear.”
“If one thing changes, you could see some exit, but not the strongest companies,” he said.
Dallal suggested that maintaining discipline will help companies, investors, avoid making decisions they will regret. “It’s time to stick to your knitting,” he said.