Net Lease Review                  Investor appetite for the                  niche sector won’t be                  losing...
rently considering the purchase of up to            Kane, too, believes the prospect of the netapproximately $400 million ...
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Net Lease...Not an Overheated Market


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Net Lease...Not an Overheated Market

  1. 1. Net Lease Review Investor appetite for the niche sector won’t be losing momentum anytime soon By John Jordan While recent economic numbers have shown the US economy may be picking up some steam, most real estate observers believe that investors will continue to flock to the less- risky segments of the market. While the pundits’ top choice remains multifamily, a growing number of investors seeking to secure predictable returns on their capital will also have net lease properties high on their list. The net lease segment was one of hottest performing sectors in real estate in 2011, so much so that some have wondered if net lease and sale/leaseback investments could cool off in 2012. Four top leaders in net lease brokerage and investment tell REAL ESTATE FORUM that scenario is unlikely. Shelby Pruett, chairman and CEO of Chicago-based Equity Global Management LLC, believes that net lease and sale-leaseback investment will continue to attract investors . In 2011, Equity Global’s main focus was in the disposition of net lease properties. This year the firm—a private equity investor that focuses mainly on the net lease, sale-leaseback and build-to-suit real estate markets- has a much different game plan Pruett was co-founder and managing principal of Equity Capital Management, a predecessor firm that was also engaged in net lease investment in the office, industrial and retail sectors. In March 2011, ECM Realty Trust, an entity Equity Capital formed to go public, sold most of the firm’s net lease assets to Realty Income Corp. in a deal val- ued at more than $500 million. In 2012, Equity Global has taken a seat on the other side of the table and is now looking to purchase net lease properties once again. Pruett reveals that the company, whose portfolio consists chiefly of investment-grade net lease office properties, is cur-32 REAL ESTATE FORUM JANUARY 2012
  2. 2. rently considering the purchase of up to Kane, too, believes the prospect of the netapproximately $400 million in mostly lease sector overheating is negligible eveninvestment-grade industrial properties from though firms such as Iridium are achieving If one ismultiple buyers. A majority of the properties more than 7% returns. Her fund’s 2012involve build-to-suit development projects investment goal is approximately $15 million disciplinedwhere Equity Global will provide mezzanine to $20 million. “The fact of the matter is, weor preferred equity financing and eventually know going into these properties the long- and employsbe the take-out buyer upon completion of term rental rates, what the value will be going the rightthe project. Those projects are in forward with the lease and how that willdevelopment and are expected to come accrue to the investor,” she says. strategy, youonline in 2012 or 2013. Equity Global isalso looking at a couple of large When asked whether the high investor can avoid orsale/leaseback opportunities as well. interest in net lease will ultimately send structure investments to prices skyrocketing, Pruett says, “As we In terms of the overall industry, Pruett have seen over time, all markets are cycli- ride through overheatedsays that net lease/sale leaseback continues cal. If one employs the right strategy and is markets.”to be a niche or “sleeper sector” for inves- disciplined, you can avoid or structuretors that is garnering more attention as a safe investments to ride through overheated SHELBY PRUETThaven with predictable returns. markets. I do think there will be geographic Equity Global Management LLC centers that overheat, which has been the Likewise, Marilyn Kane, founding partner case historically—these have often been In the retail sector, competition in hisand president of New York City-based the coastal regions. But this has been true firm’s niche—net-leased properties in theIridium Capital LLC, a $100-million hedge in all asset classes, whether or not they are $1-million to $5-million range—will con-fund founded in October 2010 that special- net lease.” tinue to be fierce, he points out. “A lot ofizes in net-leased retail assets, says that developers who in the mid-2000s weredespite increased press coverage, single- Pruett notes that many of his firm’s exist- focused on larger developments have nowtenant net lease is still considered an “alter- ing assets or acquisition targets are regional scaled back and gone after the single-tenantnative investment.” Kane believes that hubs, distribution centers, corporate head- or small multi-tenant, net-leased develop-investors still need to be educated as to why quarters or large call centers that are not ment projects because they’re less risky andnet-leased properties would be a “terrific located in coastal core markets. “They’re in easier to finance,” says Williams.asset in one’s portfolio.” Thus far, Kane the middle of the country, where there’s lesssays that approximately $10 million of the volatility,” he maintains, adding that while He expects growth from the auto parts/fund has been invested in near-investment or there are barriers to entry in some of these service sector from retailers such as Autoinvestment-grade net lease properties. locations, “the cost of the workforce that a Zone, Advance Auto, Bridgestone and lot of these corporations assemble in those Firestone. “Those guys will still expand,” he Miami-based United Trust Fund had a markets is very hard to replicate elsewhere, relates. “They’re feeding off the slow econ-“reasonable year,” according to senior vice which makes these buildings have high omy, which is causing people to hold ontopresident Fred Berliner. UTF, which spe- renewal probabilities.” their cars longer.” Similarly, discount retail-cializes in corporate sale-leasebacks and ers such as Dollar General and affordablebuild-to-suit transactions in a variety of sec- The likelihood of the market overheat- fitness chains will also be growing in 2012.tors, announced this past August a deal ing is slim, says Tom Williams, co-founderinvolving the funding and long-term lease- and managing partner of Paragon Real On the industrial side, Paragon is alsoback of a 196,000-square-foot build-to-suit Estate LLC of Oak Brook, IL. That’s espe- hoping to increase its share of warehouse/orthopedic hospital in Springfield, MS and a cially true, he notes, because there’s been distribution acquisitions in select markets.225,000-square-foot medical office building very little new net lease development or It’s also looking for new development orin Edmond, OK for the Sisters of Mercy. The redevelopment compared to the heady days existing warehouse/distribution product thattwo projects were valued at $203 million and of 2005-2007. ranges in size from 100,000 to 500,000are currently under construction. square feet. He adds that the company isCompetition in the sector, especially from Formed in 2009, Paragon specializes in seeking value-add opportunities that involveREITs, has grown considerably in the past acquiring, developing and managing retail some lease-up risk or redevelopment.two years due to the troubled economy and and industrial net lease and seniors housing "Development volume is going to increasethe penchant for investors to seek out solid, facilities nationwide. The privately held slightly, but there still aren’t many tenantspredictable returns on their investments, company is backed by a $200-million net out there saying, “We’re going to gosays Berliner. “All of a sudden everyone is lease fund, of which $10 million has been gangbusters and open a ton of new facilitiesin the net lease business.” invested in several retail facilities and one across the US in 2012,’ " Williams notes. assisted-living asset. “There’s still going to Yet while the heat’s certainly on, he’s not be strong demand for well-located, quality Several factors hold back sale-leasebackconcerned about a bubble forming, for now. net-leased properties that have strong development at the moment, including the“Yes, yields are going down, but that’s a investment-grade tenants with good lease continued low interest rate environmentfactor of low interest rates and heavy terms,” Williams contends. “If you have all that’s causing some corporate real estatedemand,” Berliner says. “It’s not over- those three elements, you’ll definitely find executives to take considerable time pullingheated; it’s just very popular.” investors and buyers for the property.” the trigger on new projects.34 REAL ESTATE FORUM JANUARY 2012