David Annett
Corporate Finance Group
Stan Johnson Company
(918) 794-9514
[email protected]
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 David Annett with the Corporate Finance Group at Stan Johnson Co. Mr. Annett writes a follow up to a previous post contributed by his colleague, Daniel Herrold.
In February of 2017, my colleague and partner Daniel Herrold discussed 2016’s net lease trends (2016: A Choppy Year for the Net-Lease Sector). Growing GDP and falling unemployment rates, among other strong economic indicators, are juxtaposed by the 4th consecutive quarter of declining YOY commercial property sales activity across all product types, leading us to believe that this year is more of the same. Despite the broader commercial real estate trends, net lease sales volumes seem to be tracking similarly to last year. Through Q3, approximately $40 billion in sales activity has been reported, positioning the year to hit the $55 billion last year achieved.
Despite the flat net lease market, we are not experiencing a ‘collapse’ or signs of it; prices are soaring (especially on a per square foot basis). Also, net lease REITs have increased their purchasing from $4.1 billion through Q2 ’16 to $4.9 billion over the same time frame in 2017 (+20.5% YOY) while only marginally increasing their disposition volume from $2.16 billion to 2.21 billion. This is a stark contrast to last year. The trend seems to point to an overall stabilizing net lease market where the largest buyers are consistently purchasing, keeping the supply-demand curves balanced.
In the next six months, we don’t anticipate volume, investor appetite, or the supply of net lease product to change much. However, as interest rates rise and the yield curve continues to flatten, alternative investment platforms may start to place pressure on sales volumes – and, consequently, cap rates – in the mid-term (12-24-month time horizon).
Any real estate article would be remiss if the proposed 1031 changes and the newly proposed tax bill weren’t mentioned. First, the House Committee on Ways and Means’ proposal will eliminate the 1031 tax code for like-kind exchanges for all BUT real property – not out of the woods yet, but this is a good sign for our industry. Second, the GOP tax plan could end up lowering commercial property depreciation from 39 to 25 years, lowering taxes on their profit and the ability to avoid a 30 percent limit on interest expense deductions. Any predictions on which of these proposals will pass would come from a shake of my magic eight ball. That said, if they are passed, we anticipate an almost immediate impact on the commercial real estate market, making our near and mid-term predictions somewhat irrelevant given the new investor landscape.
About Stan Johnson Company
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.
About GRS Group
GRS Group is a leading provider of commercial real estate (“CRE”) services worldwide. With offices across the United States, Europe, and affiliates around the globe, GRS Group provides local market knowledge with a global perspective for institutional real estate investors, occupiers and lenders worldwide. The GRS Group team has evaluated and advised on over $1 trillion in CRE transactions.
Through the company’s proprietary management process, Global Services Connection, GRS Group delivers an integrated suite of services including Financial Advisory, Transaction Management, Assessment and Title Insurance. We provide a single point of contact, capable of leveraging the GRS Group portfolio of companies and delivering customized solutions to assist our clients in achieving their investment goals.