NNN Equity Update
The fluctuation of interest rates during the third quarter and over the past 18 months have done nothing to dampen the market for net leased investments. We have noticed this across all asset types within the sector. Turning our attention towards the monthly data we collect on the market for net leased Walgreens properties, it suggests that we may be in for more of the same. Here’s how the numbers are stacking up for long-term net leased Walgreens properties (20+ years of remaining term) as we begin to wrap up 2014:
Nearly 200bps of cap rate compression
The average asking cap rate for Walgreens properties continues to push to new lows. The average asking cap rate broke through historically low levels in 2013 and we continue to see a new low set monthly. The current average asking cap rate is 5.33%, down 23 basis points in the last 12 months and 19 basis points year-to-date. For historical perspective, the average asking cap rate peaked in February 2010 at 7.27%.
Low inventory
There are currently 27 Walgreen pharmacies on the market with more than 20 years of lease term remaining. Inventory dropped by 11 units from 38 properties last month, as market absorption outpaced new availabilities. This was a larger drop than usual, and may indicate an imbalance that could drive cap rates lower in the months ahead. We generally consider the market to be in equilibrium when there are 25 to 50 Walgreens properties available. The inventory levels have consistently remained in this range since early 2012. For comparison, the inventory of available Walgreens properties peaked at 230 in late 2008 during the recession.
Narrowing spread, but room for compression
The spread between the average asking cap rate for Walgreens properties and the 10-year treasury continues to remain near 300bps, which is still well wide of the pre-recession levels. Prior to the recession, this spread was near 150bps. The spread widened rapidly to 500bps during the market’s doldrums as investors became more adverse to the perceived additional risk of real estate. While the market may never tolerate the pre-recession spread of only 150bps (equivalent of a 3.84% cap rate today), we think the spread may narrow beyond today’s historically wide spread of 300bps.
The ability to accept a narrower spread has been demonstrated over the past 18 months as market activity remained strong during several abrupt increases in interest rates. During this time, the 10-year treasury yield has climbed approximately 40 basis points while the average asking cap rate has declined more than 60 basis points.
In short, we see demand exceeding supply for long-term net leased assets with strong credit. Given historically low levels of supply and a market which appears willing to accept decreasing spreads, we would not be surprised to see some continued cap rate compression going forward.
Net Lease Market Brief
We recently completed our monthly survey of available, long-term net leased Walgreens properties and wanted to share our findings. The average asking cap rate has dropped to 5.49%, the first time that the average asking cap rate has been below 5.50%. This marks a nearly 180 basis-point drop since the average asking cap rate peaked at 7.27% in early 2010. The current number of available properties on the market stands at 46, which is an increase of 8 properties from the month before. A rapid increase of inventory is often a leading indicator of a weakening market, but the large increase this month is due to an unusually high number of assets coming to market, and not a decline in sales.
Net leased Walgreens drugstores are a bellwether of the net leased market due to the strength of Walgreens credit and the favorable lease terms. Additionally, an average asset size of $8.5M puts them in reach of private investors, making them a popular acquisition target for investors looking to satisfy a 1031 exchange.
Thomas Company provides single tenant, net leased investment brokerage and capital markets advisory nationwide. The firm serves individual and institutional investors, private equity funds, REITs, and developers throughout the United States, helping them execute transactions in the complex and growing single tenant, net leased marketplace.
Realshare Net Lease Conference Series
RealShare Net Lease has some big news. Net Lease leader Jeffrey S. Thomas, founder of the Thomas Company and one of the most respected minds in net lease, has joined the “Property Sectors in Focus” panel. Since 1992, Mr. Thomas has completed over $4.5 billion in investment transactions, representing 550 properties sold. In 2013, he founded Thomas Company after senior management positions at HFF and CBRE. Mr. Thomas will bring his recognized expertise to our must-attend session on net lease investment across the main property “food groups.”
Read more at GlobeSt.com »
Daily Journal of Commerce Thomas Company Profile
On pace to close about $200 million of net leased investment sales in the fourth quarter of 2013, comprised of more than 700,000 square feet of office space and several single-tenant retail properties, Thomas Co. just opened its headquarters in Seattle. Company founder and net lease broker Jeffrey Thomas added Adam Christoffersen to his team, which focuses on selling single-tenant office, industrial and retail buildings. Thomas spoke with the DJC about his new company and his thoughts on Seattle.
Read more at DJC.com »
Thomas Company Announces Hire of Adam Christofferson - Yahoo Finance
Thomas Company, a privately held commercial real estate brokerage that provides single tenant, net leased investment brokerage and capital markets advisory nationwide, today announced the opening of its Seattle office and that net leased veteran Adam Christoffersen has joined the firm.
Thomas Company Hires Adam Christofferson - Globe St.
The Newport Beach, CA-based firm opens an office here in Seattle and adds net leased expert Christoffersen to the firm. Thomas Co.’s Seattle office will serve clients nationally and also provide Seattle-area owners of net leased real estate a boutique brokerage firm with the ability to direct national capital to Seattle-area assets. Additionally, the firm’s expertise in sale-leaseback transactions will provide a national platform for local companies looking to unlock under-utilized capital by selling and leasing back company-owned real estate. Christoffersen is an analyst who in his decade-long career has overseen underwriting of more than $5.2-billion worth of net leased assets across a variety of property types.
Read more at GlobeSt.com »
Net Lease Market Brief
We recently completed our monthly survey of available, long-term leased Walgreens properties and wanted to share our findings. The average asking cap rate made the largest month-over-month increase since July of 2009. The average asking cap rate climbed six basis-points from 5.60% to 5.66%.
It is far too early to say that this is the beginning of an inflection, especially in light of the erratic movements of the 10-year treasury. Additionally, we would expect to see an increase of available inventory before cap rates move. We have found that the first indicator of a market correction is an increase in supply caused by slowing sale velocity. Cap rate is a lagging indicator as it can take several months for the lower demand to affect pricing.
One month of data does not reflect a trend, but we would not be surprised if the recent activity in the credit markets has become too much for the market to continue shrugging off.
Thomas Company provides single tenant, net leased investment brokerage and capital markets advisory nationwide. The firm serves individual and institutional investors, private equity funds, REITs, and developers throughout the United States, helping them execute transactions in the complex and growing single tenant net lease marketplace.
Jefferey Thomas Launches Thomas Company
Thomas Company was launched Monday as a privately held commercial real estate firm by one of the nation’s leading net lease investment brokers, Jeffrey Thomas. Thomas Company will serve individual and institutional investors, private equity funds, REITs and developers throughout the United States, helping them to execute transactions in the complex and growing single tenant, net leased investment marketplace. Real Capital Analytics estimates that these transactions constituted a $31 billion sector during 2012.
Read more at GlobeSt.com »
Commercial Real Estate Veteran Launches Thomas Company
Thomas Company, a privately held commercial real estate firm, today announced its official launch by one of the nation’s leading net leased investment brokers, Jeffrey Thomas. Thomas Company will serve individual and institutional investors, private equity funds, REITs and developers throughout the United States, helping them to execute transactions in the complex and growing single tenant, net leased investment marketplace. Real Capital Analytics estimates that these transactions constituted a $31 billion sector during 2012.