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Corporates target sale leaseback options; NNN cap rates continue to compress with strengthening yields
CHICAGO, April 24, 2013 – The shift in corporates real estate strategy coupled with strong investor interest skyrocketed the single-tenant net lease sector into previously uncharted territory in 2012, with more than $30 billion of transactions. That represents a 150 percent increase compared with a 10-year transaction activity low in 2009. The sector shows no signs of losing its luster in the year ahead. Jones Lang LaSalle’s single-tenant net lease experts expect improved fundamentals to echo through 2013 with transaction volume reaching $40 billion.
Time to Sell?Corporate executives are under increased financial pressures to maximize their real estate performance at a minimum cost, and they are finding lucrative solutions hidden on their balance sheets as real estate. With equity tied up in their real estate holdings, corporates across the country are shifting to a sale-leaseback model. The market is in prime condition to receive the supply of new product with construction deliveries at the lowest level in more than three decades.
Source: Real Capital Analytics
“There is just not enough quality net lease product to satisfy investor demand at the moment, so the time is right for savvy corporates to take advantage of the lack of supply and generate substantial profits through sale-leaseback transactions,” added Guy Ponticiello, Managing Director and leader of Jones Lang LaSalle’s Corporate Finance and Net Lease group. “Investors searching for core product are having a tough time placing their capital in the first half of 2013; however, we expect a rise in sale-leaseback volumes to increase in the back-half of 2013.”
According to Ponticiello, several key factors will contribute to greater transaction activity including an expected uptick in corporate M&A activity, the move from private equity firms to monetize their portfolio companies of strong underlying real estate assets; and the improving economic environment that will allow corporations to put their capital to better use.
In order to better serve corporates, developers and investors looking to shed single-tenant assets and capture the growth in the net lease industry, Jones Lang LaSalle created JLLExchange.com in 2011. The website serves as dedicated resource for the sale of net lease properties, and offers projections of cash flow and capital gains calculators, real time mark bond, treasury and mortgage rates, and pro forma analysis tools to inform and shape investment decisions. In 2012 alone, the platform facilitated more than $200 million transactions on behalf of more than 20 clients, with another $300 million under contract to date in 2013.
Search for ProductAccording to research from Jones Lang LaSalle, The Stanger Report and SNL Financial, investors’ capital allocations have increased, with five out of the top eight net lease institutional investors committing a combined total of more than $8 billion in equity toward acquisitions. The amount of capital available to some of the larger institutional net lease players, coupled with the need for some of the non-traded REITs to create immediate liquidity, will lead to mega-portfolio or platform purchases. The low supply and strong demand is creating a synergy unseen in any other sector, leading to remarkably low cap rates, which have declined nearly 100 basis points since the fourth quarter of 2009 from 8.1 percent to 7.1 percent. Jones Lang LaSalle expects cap rates to potentially decrease by up to an additional 25 basis points in 2013 until more substantial new supply deliveries arrive in the second half of 2014.
“Investors seeking high yields are being forced to look beyond conventional investments until the economy gains steam and drives up inflation. We’re seeing REITs, high net worth and institutional investors alike are targeting single-tenant real estate, especially those featuring credit tenants which offer security similar to that of a high grade corporate bond,” Rob Bickel Managing Director of Jones Lang LaSalle’s Corporate Finance and Net Lease group. “This influx of capital along with limited new supply will further intensify the competition in the net lease space boosting transaction volume.”
In the near-term, investors are expected to continue to financially engineer greater yields for comparable credit and lease structures than those seen at the peak of the market in 2007, even for those cap rates in the low six percent range. Well-capitalized investors pursuing net lease investments will continue to have access to low-interest financing. CMBS new issuances will be a primary source for single-tenant financing. “A resurgent lending market will enable buyers to finance high-quality net lease investments at interest rates in the low four percent with favorable interest-only periods,” added Bickel.
Ponticiello concluded, “Now is the time for corporates to consider sale leasebacks, especially if their properties feature strong intrinsic value, and if they are willing to sign long leases. We expect yield-oriented investors will continue to be drawn into the space as an alternative to traditional fixed income products while interest rates remain low. The year ahead will be a banner one for net lease investments.”
Jones Lang LaSalle’s Corporate Finance and Net Lease experts offer a proven track record of success in selling office, retail and industrial net lease properties. Since 2005, the team completed more than $10 billion worth of net lease transactions, involving both portfolio and single-asset categories and a wide range of investor profiles.
Jones Lang LaSalle Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In 2012 alone, Jones Lang LaSalle Capital Markets completed $63 billion in investment sale and debt and equity transactions globally. The firm’s dealmakers completed $60 billion in global investment sales and buy-side transactions, equating to nearly $240 million of investment trades completed every working day around the globe. The firm’s Capital Markets team comprises more than 1,300 specialists, operating all over the globe.
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About Jones Lang LaSalleJones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet. Its investment management business, LaSalle Investment Management, has $47.0 billion of real estate assets under management. For further information, visit www.jll.com.
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