2016: A Choppy Year for the Net-Lease Sector

From time to time, GRS Group likes to highlight its clients and industry associates that are thought leaders in commercial real estate. For this installment, we have a guest column by Daniel Herrold, a senior director with Stan Johnson Co., who weighs in on the net-lease sector.

Daniel Herrold Senior Director Stan Johnson Co.

Daniel Herrold
Senior Director
Stan Johnson Company

In the net lease marketplace, volumes were down in 2016 as compared to the previous year. According to Stan Johnson Company, net lease volume for 2016 was approximately $52.5 billion, down nearly 18 percent as compared to the previous year. There were a several variables that gave investors pause last year.

For one, the institutional buyer pool is a significant buyer in the net lease marketplace. Institutions are constantly evaluating where interest rates and cap rates are heading, and they adjust their buying and selling patterns accordingly. In the first half of 2016, institutions were net sellers; aggressively disposing of assets within their portfolio that weren’t performing well or those assets that contained a tremendous amount of extractable value. Most real estate investment trusts (REITs) were effectively selling, attempting to take advantage of the aggressive cap rate market.

The net lease industry saw the impact of REIT activity within the first six months of 2016. When the institutional buyer pool is essentially eliminated, supply and demand gets out of balance, subsequently causing a ripple effect to occur in the marketplace. There were additional ripples in the market which causes pauses in transaction activity, be it the BREXIT news, the slight increase in interest rates, or the effects of the pending presidential election. This is the third US election I have been through in commercial real estate, and it’s always seems to be a soft year, due to the uncertainty. High-net-worth investors have a propensity to pause and keep their money in their pocketbooks, versus spending it. In most cases, it doesn’t matter who the president ultimately is, investors typically wait until the election is over and it’s usually business as normal.

There is a cautious optimism across the board amongst brokers and certainly my peers, about 2017 and beyond. Our sense so far is that 2017 is probably going to be the same, from a volume standpoint, as 2016. But we certainly don’t predict to see a significant dip in volume. There will many underlying themes occurring throughout the year resulting from the policies that newly elected Donald Trump institutes. The outcome of those policies probably won’t have an effect this year, but we could see more impact of in 2018.

In the next six months, we believe the volumes, investor appetite, and the amount of supply that hits the market is probably not going to change much what we are experiencing today, even if interest rates slowly inch up over that period. It’s doubtful that you’ll see a lot of volatility in the commercial real estate market. However, if there are certain proposals that go into place and impact corporations in the US, there could likely be changes in the next nine or 12 months.

Check back with us in six months when we catch up with Daniel Herrold to see what we can expect from the market for the rest of the year.

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Stan Johnson Company is the largest collaborative team in the single-tenant, net lease industry, offering acquisition, disposition, pricing advisory, and 1031 exchange services to a wide range of clients throughout the United States. This intense specialization has resulted in an extensive network of brokers with insider knowledge and strong relationships – enabling us to efficiently match buyers with sellers. Drawing on a full array of retail services, our professionals create superior solutions for sale leaseback, fee simple, ground lease, leasehold, and zero cash flow deals. As of 2017, we’ve completed over $25 billion of single tenant, net lease transactions nationally.

 

 

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