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Barclay G. Jones III, EVP of investments for iStar Financial: There's less of a move away from “sustainable underwriting” this time around, but “mezzanine down below 8% makes us nervous.”
NEW YORK CITY—With cap rates for core assets dipping down to levels last seen in 2007, it’s legitimate to question whether net lease is back to a bubble. CGA Capital Corp.principal Kyle Gore, moderating the “Capital Markets Update” panel at Wednesday’s RealShare Net Lease conference here, did just that.
If a bubble is forming, we’re not likely to see it burst anytime soon, in the view of Kenneth Zakin, senior managing director of NGKF Capital Markets. Even if interest rates rise, as many industry members believe they will sooner or later, the net lease market still has several good years ahead of it. “People still want to buy net lease,” said Zakin. “The capital isn’t going away.”
ARC Properties Trust’s James Steuterman, a panelist in a later discussion, similarly doesn’t see interest rate increases doing much to slowmomentum. Although there have been some bumps in rates over the past six months, “the capital flow has been so strong that you haven’t really seen it in cap rates yet," he noted.
Fellow panelist James Brault, chief executive and chairman at Brauvin Realty Trust, concurred. “There’s just too much money in the system chasing a relatively limited number of deals,” he said.
It certainly feels like 2006 or ’07 in terms of the availability of capital, observed David Persky, managing director in global private markets for TIAA-CREF. The environment for financing credit tenant leases will be “ultra competitive,” said Persky, who noted that when the CMBS market had virtually shut down, “we did well.”
TIAA did $1 billion in financing for net lease in 2013, Persky said. “I’d love to say we could do that this year, but I’m not sure,” he added.
Barclay G. Jones III, EVP of investments for iStar Financial, thinks debt sources thus far have been more prudent than they often became at the last market peak. He’s seeing less of a move away from “sustainable underwriting” this time around. But he adds, “Mezzanine down below 8% makes us nervous.” Still, he concurred with Gore’s characterization of underwriting as “aggressive, but not yet stupid.”
The sector has evolved in other ways, as the “Investment and Transaction Outlook” panelists made clear. At ARC Properties Trust, the mix has gone from 30% development and 70% acquisitions to very nearly the opposite, said the REIT’s president and COO, James Steuterman. “The development side has grown dramatically,” he said.
And while supply of net lease product is a perennial sore spot, Marcus & Millichap’s John Glasssees increases as a source of potential headwinds. SVP of investments at MMI, Glass noted that the inventory of Dollar General stores on the market has gone up by nearly half from $145 million last year. Even so, Stan Johnson Co.’s Jason Maier noted in a later panel, the cap rate on these stores has gone from 8% to about 6.25%.
About 75% of domestic buyers at present are in 1031 exchanges, Glass noted. And those exchanges are growing bigger, noted Jonathan Hipp, president and CEO of Calkain Cos. and GlobeSt.com columnist. He added, however, “It’s still very tough to find product to put $100 million into” via an exchange.
As for who’s selling, Hipp said they’re owners who got locked into product a few years ago, and now want to take advantage of cap rate compression. Steuterman noted a great deal of “culling” from portfolios, including those held by publicly traded companies.