A Guest Post By Bryan Gitlin, Managing Partner, Cambridge Capital Advisors
Why Investors Are Actively Pursuing Net-Leased, Investment Grade Commercial Real Estate As A Safe Haven In Today’s Troubled Economic Environment.
The investment community is slowly continuing its recovery from the effects of the sub-prime mortgage crisis as well as the collapse of the CMBS market. At this time, public and private, institutional and non-institutional real estate investors have continued to actively invest in an asset class where the laws of supply and demand are creating CAP rate compression where real estate values across the board have largely depreciated. The genre of commercial assets that is being referred to is comprised of single tenant, net leased, investment grade properties.
In acquiring an asset of this nature, the investor typically purchases a fee simple interest in the property. The property, comprised of the land and the structure that sits on top of the land, is leased by a corporate tenant with an investment grade credit rating (S&P rated BBB- or better) on a long term basis. In analyzing the merits of a single tenant, net-lease deal an investor will research and underwrite the strength of the corporate credit that guarantees the lease payments, the terms of the lease and any lease options, the landlord and tenant responsibilities that are enunciated in the lease and the relative strength of the demographics and trade corridor where the property resides. In addition, the investor will look at the intrinsic value and location of the property, the rent that the tenant is paying per square foot and the sales data for the location if available. This analysis is critical in underwriting the viability of the tenant and their ability to successfully operate in the location over the duration of the lease term. The investor will also look at the capitalization rate as a function of determining the rate of return on the investor’s equity in the event that acquisition is made entirely with cash. An investor looking to utilize leverage will also search out financing options if higher returns are mandated by that investor’s acquisition criteria and may also depend upon the amount of equity the investor is looking to place.
The obvious worst case scenario for an investor in a net lease deal would arise in the event that the tenant abandons the location. This scenario emphasizes the importance of underwriting the tenant’s credit worthiness as the tenant would still be responsible for paying rent through the balance of the term regardless of their occupancy of the real estate. Furthermore, the importance of evaluating the intrinsic value and location of the real estate in addition to the rent being paid by the tenant as a function of whether the rent is in line with the local market is critical in the event that the tenant is ever declared insolvent or adjudged bankrupt as the responsibility of re-letting the building would fall on the property owner. The risk assumed in this absolute worst case scenario is more than offset by conservatively underwriting the tenant and their credit in addition to the overall market demand for the real estate.
Benefits of Asset Class
Furthermore there are a number of reasons why investors looking for higher yields in today’s economic climate are looking to invest in this asset class. Where yields in the stock market, bond market, money market accounts and CD’s have clearly suffered, investors in single tenant net-leased, credit real estate are experiencing returns in the seven to twelve percent range depending upon how the real estate is financed. Considering the non-management intensive nature of ownership, the tax benefits of real estate ownership, and the principal reduction of the debt that is afforded by the tenant in the event that the acquisition is financed, these investments are highly preferential for a wide variety of cash return driven investors including those that are in the process of estate planning.
If you are interested in obtaining further information on investing in single tenant, net-leased, commercial real estate or would like a free consultation/valuation of your investment property, please contact Bryan Gitlin via email (click here) or by telephone at 617-964-1031.
Bryan Gitlin, J.D. has been actively involved in the acquisition, re-development, management, leasing and disposition of commercial real estate since 1998. A founding member of Cambridge Capital Advisors and seasoned investment broker, Mr. Gitlin’s concentration is the acquisition, disposition, underwriting and deal sourcing of investment properties with a primary focus on single-tenant net leased properties and shopping centers nationwide.