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While 2023 was not kind to net lease, things have been improving so far in 2024, particularly for single-tenant.

A new report from the Boulder Group says that in the second quarter of 2024, single-tenant net lease saw cap rates increase for the ninth consecutive quarter. That was for all three sectors, with retail hitting 6.47% (up five basis points), office up 7.67% (an increase of seven basis points), and industrial at 7.10% (eight basis points up).

Things have been improving since the middle of Q2. In May, Marcus & Millichap said single-tenant net lease was in good shape. They pointed to the continued strength of the labor market and says that has supported increases in retail spending beyond inflation for real growth. Real increases in wages also helped by giving people on average more money to spend after price inflation.

The Boulder Group also noted that property supply had increased by 8.7% over the first quarter. Q2 also saw the largest number of properties on the market since 2021 Q4. For retail, the amount of inventory increased quarter over quarter by 8.1%. Office was up 11.4% and industrial, 9.5%.

Investors have shifted their positions. They largely think that the market currently favors buyers, which would fit with the ongoing increases in cap rates. That is particularly true for commoditized properties. Buyers have little competition and, as a result, are largely focused on either tax-free states or regions with strong demographic drivers. They’re also looking for CRE fundamentals and tenants with good credits. Stronger brands — Olive Garden and Texas Roadhouse, Boulder gave as examples — haven’t seen increases in cap rates.

Breaking results down even further, the auto sector has seen a five-point increase in cap rate. Median asking cap rates vary by lease term remaining. So, an auto service location with 16 to 20 years left has a 5.50% cap rate, but a 7.15% one for five years or less.

Casual dining saw an eight-basis point increase in general. But the rates varied from 5.25% for a Texas Roadhouse ground lease to 7.25% for either a Buffalo Wild Wings or an iHOP. Median asking cap rates ran from 6.05% for 16 to 20 years left on the lease to 7.30% for five years or less.

Dollar stores ran from 6.75% for Dollar General to 7.80% for Family Dollar. Net lease drug stores have seen some tough times for Walmart, Ride Aid, and Walgreens. The overall sector saw asking cap rates of 6.67%. But even if particular locations are threatened, the quality of the real estate that drug stores have accumulated is good, meaning owners should be in good shape, even if a store pulled out, as there will be plenty of other opportunities.


Source: GlobeSt.

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Cap rates for the single-tenant net-lease sector increased for the eighth consecutive quarter in Q1 2024, jumping to an average of 6.64% across all major asset types.

STNL asking cap rates for office properties hit 7.6% in Q1, followed by industrial, which averaged 7.02%, and retail, which jumped to 6.42%, according to the latest market report from The Boulder Group.

According to The Boulder Group’s Jimmy Goodman, the current cycle of STNL cap rate increases is the longest since 2014. In an interview at GlobeSt.’s Net Lease conference in NYC this week, Goodman said STNL cap rates will remain elevated until the Fed starts cutting interest rates.

“I think we’re at status quo, this is the new normal until the Fed moves to cut rates,” Goodman said. “Everyone had this level of hope last year that we would have rate cuts this year, but 2024 is looking a lot like 2023.”

“Now, people are hoping for a rate cut in Q3, but it probably won’t be a large cut,” he added. “Until then, nothing will change. Cap rates will increase or plateau. I don’t see them decreasing any time soon.”

The new status quo also is likely to keep transaction volume at a minimum — one description we heard is “flatlining” — as buyers are few and far between and sellers refuse to reprice their deals to higher cap rates.

Most of the players in the STNL market are in it for the long-term, typically with 10- or 20-year leases, and they can wait out the down cycle, Goodman noted.

“It’s a steady cash flow. The lenders, the equity, they know they’re going to get a check from the tenant,” he said. “If a $2M Starbucks just got built, it’s got a 10-year lease and they know they’re going to get paid.”

Sellers are still in denial about bringing their pricing in line with the new status quo on cap rates, Goodman suggested.

“If you’re a developer, you still want to make money off your merchant developer deals. The public REITs and people that are subject to financing can’t pay the cap rates the developer wants, and the developer doesn’t want to be upside down,” he said.

“Everyone is staring at each other and nobody is blinking,” Goodman added.


Source:  GlobeSt.

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You might know that Sound of Music sing-a-longs are a thing in live theater and online. You can bet that one of the favorites is Climb Every Mountain. If only triple net lease could step out of the spotlight.

Unfortunately, the sector seems to be providing encore performances as average closing cap rates keep their upward inclination, according to the Lomuto Report out of Northmarq.

“[The] indicators are saying we’re probably not done with rising cap rates just yet,” Chris Lomuto wrote. “Lots of existing inventory to burn off, maturing loans that may be difficult to roll over, developers needing to recycle capital, tight spreads, and a dearth of 1031 buyers. These are not traditionally a recipe for stable or falling cap rates.”

The mechanisms at work seem clear. In short, there’s more supply and less demand, squeezing out the value owners can claim and lowering the willingness of buyers to pay higher prices. As long as the conditions continue, there’s upward pressure on closing cap rates.

Though Lomuto notes some trends that could eventually head things off and restore a more dynamic market. For example, the average asking cap rate trend for all NNN started to rise in May 2022, when they were about 5.25%. With some minor ups and downs, it’s continued to rise and has gained roughly 100 basis points to 6.25%. Owners are recognizing that they can no longer expect as much as they could have in the near past when markets were at a high and the full impact of higher interest rates hadn’t yet been felt.

With the rise in asking cap rates had been compression of the gap between them and benchmark yields from, in the case of the federal funds rate, 587 basis points in January 2021 to 91 basis points in December 2023. The gap to the 10-year Treasury had been 488 basis points in that same January and now are 222. The S&P 500 earnings were spaced out by 295 and now that gap is 239. All in all, the biggest gap is within under 240 basis points.

Where things can get a little odd is looking at cap rates by product type. Lomuto shows a number of categories: auto and car wash, convenience and gas, dollar stores, grocery, industrial, office, pharmacy, and QSR. Measured from peak pricing, pharmacy is up by only 75 basis points (he points out that issues with Rite Aid and Walgreens should have had more effect). Grocery, one of the die-hard categories, has seen cap rates up over dollar stores. And office seems up only by 50 basis points — okay, more than odd, more like crazy.

When transactions are thinner than usual, “it’s very important to look critically at individual comps, including a thoughtful survey of what else is on the market now, when quoting a cap rate.”


Source:  GlobeSt.

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Even the experts appear reluctant to predict what 2024 holds for the commercial and multifamily mortgage markets, though they hope the year will bring more clarity.

The just-released Mortgage Bankers Association’s 2024 Commercial Real Estate Finance Outlook Survey describes an unsettled market for borrowing and lending – but anticipates conditions will stabilize in the new year.

One thing is clear. Even though borrowing has declined, the level of outstanding mortgage debt has continued to rise. “A decline in sales transaction and refinance volumes has meant less new debt being extended, but it also means that fewer loans are paying off than in many earlier periods. The result is that debt levels continue to rise, but at a pace that is roughly half of what was seen last year,” the report stated.

“The level of commercial/multifamily mortgage debt outstanding increased by $37.1 billion (0.8 percent) in the third quarter of 2023 to $4.63 trillion. Multifamily mortgage debt alone increased $26.8 billion (1.3 percent) to $2.05 trillion from the second quarter of 2023.”

Virtually every type of lender increased the dollar volume of its holdings of commercial/multifamily debt.

This has happened even though CRE mortgage borrowing plummeted 53% in the year to date. Loan originations fell 7% between 2Q 2023 and 3Q 2023 and 49% year over year – a slump that affected all major property types.

Mortgages that mature in 2024 could bring more clarity to the prospects for the CRE market – “and could force the issue for many owners,” the report stated.

“Many maturing loans have and will refinance easily – providing new ‘marks’ for the market. Maturing loans that have difficulty refinancing at terms the borrower hopes for, as well as loans that are facing challenges during their terms, may end up being another key to unsticking the markets.”

Underlying these problems are questions about property fundamentals, uncertainty about property values, and higher and volatile interest rates. “Greater certainty around these conditions is a key prerequisite to breaking the logjam of transaction activity” that has left many participants on the sidelines, the report commented, noting that the recent drop in long-term interest rates could bring relief to both cap rates and financing costs. At the same time, it pointed out that the Fed’s tight money policy could still have impacts in the future and tightening of credit is also possible.

Meanwhile, different analysts produce different conclusions on how property values are being affected.

“Most series show cap rates increasing but the pace lags the growth in broader interest rates that many look to as a base comparison,” the report said.

RCA found apartment cap rates rose to 5.2% in 3Q 2023, industrial cap rates to 5.9%, retail to 6.6% and office to 6.9%. MBA’s own models predicted a more substantial rise but said market uncertainty makes the situation unclear.

Each sector of CRE faces difficulties. Offices are grappling with how hybrid work will affect demand for office space, leaving owners to figure out which properties will be most affected. Quality of buildings rather than age, is said to be most important. Industrial and multifamily properties are facing a supply glut that outstrips demand and slows rent growth, though industrial vacancy rates remain low and rent growth remains positive. Retail, especially general purpose buildings, is seeing demand but some malls are experiencing negative net absorption.

As CRE markets confront these challenges, there has been a slow and steady uptick in delinquency rates, the report found. The share of properties with outstanding loan balances that were current or less than 30 days late fell from 97.7% at the end of 2Q 2023 to 97.3% at the end of 3Q 2023. Loans backed by office properties were largely responsible, with delinquent loans up from 4% to 5.1%. However, all sectors saw delinquencies rise, though for multifamily and industrial property the hike was less than one percent. And every capital source saw an uptick in unpaid principal balances.

The findings are based on a survey sent to leaders at 60 of the top commercial and multifamily mortgage origination firms, with a 40% response rate.

“CRE markets are entering the new year relatively stuck,” summed up Jamie Woodwell, MBA’s head of CRE Research. “Leaders of top CRE finance firms believe that a host of factors may continue to act as a drag – rather than a boost – to the markets. However, they do believe that overall uncertainty will dissipate over the year, helping to boost borrowing and lending above 2023 levels.”


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By Ron Osborne, Managing Director, Sperry Commercial Global Affiliates | RJ Realty


As a financing method, a sale-leaseback holds more advantages for businesses compared to leveraging their balance sheets. With today’s escalated interest rates, a scenario has emerged where the sale-leaseback option outweighs borrowing avenues for companies. If a business’s borrowing rate for a leaseback (or cap rate) is significantly lower than its corporate borrowing rate, redirecting equity tied up in a building becomes a viable alternative, particularly for business expansion.

Often, businesses encounter opportunities to broaden their reach or enhance their current facilities. Capitalizing on these prospects sometimes demands more funds than readily available. In such cases, selling the property, unlocking the tied-up equity, and reinvesting it into business expansion or improvements becomes a more cost-effective solution than traditional borrowing options.

Consider this: if the borrowing rate stands at 9% to 10%, but the business can sell and lease back the property at 6% to 7%, there exists a substantial 200 to 300 basis point spread. Undoubtedly, this presents a far more advantageous financing route than leveraging the balance sheet.

This strategy empowers the company to retain control over the asset by becoming a tenant for a specified duration—a 5-year, 10-year, 15-year term, or as outlined in the agreement.  Sometime the buyer will give the ownership the First Right of Refusal or Option to buy back the property at some future time and price.

Sale-leasebacks have served companies, regardless of their size, for numerous years, facilitating business expansion, debt reduction, or other alternative uses made possible by the equity in their properties. They’re  an excellent method for companies to unlock dormant equity and channel it toward paying off debts, acting as a debt substitute, or funding crucial business-related upgrades.

Given the recent substantial rise in interest rates over the past couple of years, businesses eyeing property purchases or refinancing endeavors to expand could view a sale-leaseback as a viable alternative to an SBA loan.


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The CRE industry is different than all other industries in that it is a transaction-based model. The lifeblood of the industry is dependent on sale, financing, and lease transactions. The more transactions there are, the more money the industry and everyone in it makes and the more successful the business. 2021 was a record year for transaction volumes and a phenomenal boom year for CRE.

The most successful companies and individuals in the industry are usually adept at selling, financing and/or leasing CRE property. However, in pursuing these transactions the same key mistakes are made over and over again which usually results in poor performance, the loss of equity in a property or the loss of the property in foreclosure. Below are the 15 biggest investing mistakes in CRE that are the root cause of bad deals, according to Joseph J. Ori, Executive Managing Director at Paramount Capital Corporation, a CRE Advisory Firm.

  1. Acquiring properties at low cap rates. Cap rates below 5.0% are not justified even if the investor believes that future rent increases, which may not happen, will make up for the low initial return. Buying CRE at sub-5.0% cap rates is like buying a tech stock at a 100-price-to-earnings ratio.
  1. Not diversifying a national portfolio by property type, location, and industry. Many national firms diversify a large fund by type and location but forget about industry diversification. If an investor buys only apartments and offices in Silicon Valley, 70% of the apartment tenants work in the tech industry and 70% of the office tenants are technology or related companies. If the tech industry retracts in a downturn, many of the apartment tenants may be laid off and unable to pay their rent or may move home or double up with roommates. This will negatively affect the apartment market. Many of the office tech firms may default on their leases or shrink their space requirements, which will negatively affect the office market.
  1. Not performing property level and financial due diligence on all properties in a portfolio acquisition. Many institutional investors that acquire large portfolios consisting of dozens or hundreds of properties do not do sufficient property-level due diligence. They only look at the larger and more valuable properties in the pool or hire inexperienced third-party firms to do the property-level due diligence.
  1. Acquiring properties with negative leverage. Negative leverage occurs when the cap rate is less than the mortgage constant, which means the cash-on-cash return will be lower than the cap rate, which is a “no-no” in CRE. Many firms acquire properties with negative leverage believing that future rent increases will more than make up for the low initial return.
  1. Using short-term floating rate debt without the protection of a swap or collar to finance a long-term real estate asset or portfolio. This is what has occurred during the last two years as the Fed abruptly raised the federal funds rate from 0.0% to 5.25%. Many CRE investors were caught flat-footed by the quick increase in interest rates from floating rate debt and no interest rate protection and are now scrambling to lower their financing costs and risk.
  1. In underwriting an acquisition, using a terminal cap rate that is less than the going-in cap rate. This is often done by the acquisition or other internal group within a large CRE firm to “juice up” the internal rate of return on the equity in a deal underwriting.
  1. Institutional investors who commit capital to sponsors who have inexperienced senior management teams. The senior management team should have gray hair and have been through at least the last two secular CRE downturns of 1987-1992 and 2007-2012. One of the most important drivers of success in CRE investment is having individuals on the team with significant and long-term experience and knowledge in all property types, markets, and economic recessions.
  1. Using overly optimistic rent projections in underwriting a deal. This often occurs when  the acquisition or other internal group wants to make the deal look better and the deal to be developed or acquired.
  1. Not analyzing the sales volumes per square foot of retail tenants, a key metric when buying shopping centers. One of the most important metrics when buying shopping centers after the cap rate, is the sales per square foot of the anchor tenants. High sales per square foot means the center is in an A location, will remain fully leased and in high demand from tenants and shoppers.
  1. Using high leverage of more than 75%. One of the highest risks in CRE investment is using high leverage and this was one of the causes of the Great Recession from 2007 to 2012.
  1. Not giving senior-level employees an equity interest in the company, portfolio, or fund. This is what is known as the “golden handcuffs” in CRE. If you don’t take care of your key people, they will leave and become your competitors.
  1. Not incorporating the 15 risks of CRE in a real estate firm. The risks include cash flow, value, tenant, market, economic, interest rate, inflation, leasing, management, ownership, legal and title, construction, entitlement, liquidity, and refinancing into the firm’s investment strategy.
  1. Investing in property sectors like hotels and senior housing, which are more operating businesses than real estate deals, in which the investment firm has no experience. Hotels are typically 70% operating business, and 30% real estate deal and senior housing is 80% to 100% operating business and 0% to 20% real estate.
  1. Not obtaining the Kmart discount when acquiring a large portfolio of CRE assets. Whenever a large CRE portfolio trades it is typically made up of Class A queens, Class B pigs and average Class B deals, and the buyer needs a discount of at least a 1.0% higher cap rate for the risk of the Class C properties.
  1. Not checking the formulas in an XL underwriting workbook, as there is at least one formula error in every CRE underwriting worksheet. This is a common occurrence when preparing a complicated Excel underwriting workbook and firms should make sure that  all formulas are rechecked by an independent party.


Source:  GlobeSt.

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Forecasts are helpful, but how accurate they are is what ultimately counts.

CBRE undertook a review of the forecasts it made at the beginning of the year and updated its outlook through year-end and into 2024.  For the most part, the company has nailed the trends that have been occurring in the CRE capital markets, with a few exceptions.

Namely, it has altered its prediction about the timing of a recession due to the resilient economy and persistent inflation. It now predicts if one happens it will occur in late 2023 or in the first quarter of 2024, one quarter later than it originally thought. A recession may bring a mild increase in unemployment to about 5%. Other headwinds of higher interest rates may affect growth negatively in this year’s second half and the restart of student loan payments may pare consumer spending. CBRE has adjusted its 2023 GDP growth forecast upward to 0.6% and 2024 growth forecast downward to 1.3%.

Investors have been cautious so far this year in their transactions, with volume down by 60% year-over-year in the second quarter. Uncertainty about interest rates and the outlook and tighter credit conditions are expected to continue to be hurdles to deal flow, but more stable conditions are coming, it predicts, before year-end. That should bring pick-up in investment activity, CBRE says.

Cap rates have increased by about 125 basis points for most property types but variations occur by market and are closer to 200 bps for office assets. By early 2024 there should be cap rate stabilization for all property types, except offices, which won’t stabilize until next mid-year.

Investment volume is forecast to decline by 37% year-over-year this year and increase by 15% next year due to greater certainty about interest rates and as the economic outlook supports stronger purchasing activity.

Finally, an interest rate cut is not expected until early 2024 and the 10-year Treasury rate will end this year at 3.8% before falling closer to 3% late next year.


Source:  GlobeSt.

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A somber portrait of the state of U.S. capital markets and their impact on CRE has emerged from Newmark’s second quarter Capital Report.

It depicts a landscape of low loan originations, fewer lenders, underwater loans, troubled debt about to mature, and rising cap rates across a wide swath of the CRE spectrum.

Loans are hard to get in this new world. CRE debt origination is down 52% in 1H 2023 compared to the prior year and 31% compared to before the pandemic. Equally concerning, there are 32% fewer active lenders in the market today compared to a year ago.

“The small and regional bank lending engine that has driven the CRE market is rapidly slowing with no clear replacement,” the report noted. 

And this is affecting the entire banking industry, not just regional banks. All property types and lending sectors are affected, “though office, debt funds and CMBS/CRE CLOs (commercial real estate collateralized loan obligations) are negative outliers.” Loan originations are down most dramatically for multifamily.

Furthermore, banks are being more restrictive about whom they lend to and the assets they are willing to consider.

And if loans are hard to get, some of those that were made in the good times and are coming due will create new headaches. Newmark predicts that $1.4 trillion in debt will mature in 2023-2025 — but with significantly higher debt costs than when the loans were originated. On top of that, many loans are actually or nearly underwater, especially recently issued property and office debt.

The report also identified clear increases in transaction cap rates, “which now appear distinctly unattractive relative to the cost of debt capital, possibly excepting office REITs.”


Source:  GlobeSt.


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Industrial outdoor storage (IOS) is emerging as an increasingly popular property sector among institutional and other types of investors.

Interest in the sector ramped up during the pandemic as space was needed for container storage to relieve backlogged ports. Estimates from the experts WMRE interviewed suggest that the U.S. IOS market, which represents a niche within the larger industrial asset class, ranges somewhere between $130 billion and $200 billion in value.

Zoned for industrial use, IOS sites typically house vehicles, construction equipment, building materials and even shipping containers on an interim basis and range in size from two to 10 acres, often including a small building. The sector has been referred to as a “beautiful ugly duckling” by Green Street’s Vince Tibone since the properties are just lots with storage containers and construction equipment that have delivered “exceptional” returns over the last three years and brought in more institutional investors for funds raising hundreds of millions of dollars to target IOS.

While the sector is not immune to the same forces that are affecting other property types in the current environment, Tibone said he remains bullish on IOS over the next five to 10 years. Investor demand for IOS has been buoyed by strong recent operating results, favorable long-term supply/demand dynamics and a minimal cap-ex burden with an option to use the land for a higher and better use at some future time.

IOS sites located in infill submarkets in particular can deliver risk-adjusted returns “that are superior to those available on most other commercial real estate investments, including traditional industrial,” Tibone said. However, the fragmented, non-institutional ownership structure of the sector today makes it difficult to invest at scale, he noted.

“IOS portfolios do not come on the market often and the best returns are likely available through one-off deals, where there could be operational upside left on the table from the prior owner,” Tibone said. “Those with the patience and wherewithal to aggregate infill IOS sites over time should be rewarded with robust total returns relative to other property types.”

Among investors that are currently raising funds and targeting acquisitions in the IOS marketplace is EverWest Real Estate Investors, a Denver-headquartered real estate investment advisor with $5.2 billion in assets under management, including in the industrial, multifamily, office and retail sectors.

EverWest operates open-end funds and three single–client accounts with industrial strategies focused on IOS. The average size of the deals it has completed ranges between $10 million and $25 million.

So far in 2023, EverWest acquired two IOS sites—39.6 acres south of Atlanta for $12 million and 4.12 acres in Miami for $12.5 million, according to John Maurer, EverWest’s senior managing director and head of portfolio management. In May, the firm also invested in an industrial asset in Carlson, Calif. that includes acreage that can be used for IOS.

Part of the appeal of the sector is that when U.S. industrial inventory tightens and rents rise, IOS sites rise in value as they become reliever locations for a wide range of logistics activity, Maurer noted. In addition, in a market where industrial assets are still often priced at a premium, with cap rates as low as 4.5%, an IOS site adjacent to such a traditional industrial asset will often sell at a cap rate that’s 50 basis points higher. Rental rates in the sector have also been rising by 3.5% to 4.0% a year, according to Maurer.

EverWest’s open-end fund, the Open End Diversified Core Equity Fund in the NFI-ODCE Index, has a target return of 10%. Like Tibone, Maurer noted that the IOS marketplace is less institutionalized than regular industrial and has more fragmented ownership.

“We think because it’s difficult to acquire these sites that are smaller, if you aggregate portfolios in a target market that there’s going to be a cap rate compression,” Maurer said.

As a result, EverWest aims to aggregate a number of acquisitions from different sellers to build up its IOS holdings. Over the past 12 to 18 months, the firm has invested about $200 million in the IOS sector and it hopes to double that volume in the next 12 to 18 months. EverWest is also planning to launch an enhanced fund with a higher return strategy in the near future that will have a significant IOS component, according to Maurer. The firm is hoping to build off its current investor base of public and private pension plans, foundations and endowments, insurance companies and financial advisors for the fund, Maurer said.

However, Maurer admitted that EverWest’s transaction volume is currently about 15% off what it was a year ago because the increase in interest rates has made the firm more selective in making new purchases.

“There are some compelling opportunities in the marketplace in terms of attractive return potential, given where rates are today versus they were 12 months ago,” Maurer said. “We always want to look at where pricing is going and take advantage of correctly priced opportunities. What we see is sellers ultimately capitulate and need liquidity, so they will sell at market-clearing prices based on our new model for interest rates in the current environment.”

Assuming a leverage level of 40% to 40%, EverWest’s investments can deliver gross returns of 12% to 14% over a seven- to 10-year period, Maurer noted. That would require a barbell approach of doing straight up five-year lease IOS deals, he said. There would also need to be some value-add component for redevelopment in its strategy. About 20% of the IOS marketplace is about adding a warehouse over time, Maurer noted.

Change Is Coming

In the meantime, the number of institutional players involved in the sector is growing. For example, Brooklyn-based Zenith IOS, a builder and owner of outdoor storage properties, has partnered with institutional investors advised by J.P. Morgan Global Alternatives, to buy hundreds of millions of dollars of IOS properties last year. In February, J.P. Morgan and Zenith IOS announced a $700 million joint venture to buy more IOS assets.

Another active participant in the marketplace is Alterra IOS, which is part of Philadelphia-based Alterra Property Group, a real estate investment and development company that, according to reports, made more than $850 million in acquisitions over the past year.

In its most recent announcement, dated June 22nd, the firm expanded its presence in Las Vegas by acquiring a six-acre site for $7 million—its third in the marketplace.

Alterra declined to comment on its current fundraising effort, instead referring to a public filing from the Ventura County Employees’ Retirement Association (VCERA). The filing contained a recommendation to commit $35 million from the pension fund to Alterra’s IOS Venture III fund. Alterra’s goal has been to raise $750 million for the fund targeting IOS properties, according to IPE Real Assets. A previous Alterra fund raised $524 million in 2022, exceeding the firm’s goal of $400 million.

IOS Venture III will target smaller, infill IOS assets operating on triple net leases. Part of the value proposition of these assets, according to VCERA’s filing, is that they are typically owned by single owner-operators and have escaped the attention of most institutional investors. Alterra also plans to leverage its in-house management and leasing expertise to pursue value-add strategies for the assets. The firm estimates that it will generate from 30% to 40% of its total returns through the assets’ current cash flow, creating annual cash flow yields of 6% to 8%.

The fund has an eight-year horizon, with two one-year extension options, and will offer a preferred return to investors of 9%, with a carried interest of 20%. The fund’s net IRR target is between 14% and 16%, with a leverage ratio of 65%.

In addition to VCERA, Alterra’s equity investors include other public pension funds, foundations, endowments, insurance companies and family offices, both domestic and foreign, according to Managing Director Matthew Pfeiffer.

“Investors are finding IOS an attractive proposition right now because, unlike with a number of other real estate assets, supply is structurally muted, with municipalities not being incentivized to add new zoned land for outdoor storage,” Pfeiffer said.

He also mentioned the attraction of low cap-ex.

“Beyond the favorable supply and demand dynamics, IOS also benefits from being a very low capital expenditure business translating into low frictional leasing costs to put new tenants in the space,” Pfeiffer noted. “Lastly, the tenant profile is largely credit and national, under a triple-net lease structure that further entices institutional capital’s interest in the space,”

According to BJ Feller, managing director and senior vice president at Northmarq, cap rates on traditional industrial properties have gotten so aggressive in recent years that institutional capital was looking for opportunities with a similar profile, but more attractive cap rates.

“Once they’ve been able to establish their credibility and track record in the segment, we’ve seen operators have great access to the capital sources who want to play in this asset class,” Feller said.

He added that while equity inflows to the sector have “cooled to a certain degree” on a year-over-year basis, they remain robust relative to other property types.

“Most of the decline has been a reaction to caution that cap rates may be going mildly higher and offer better acquisition opportunities in the months ahead,” Fuller said.


Source: Wealth Management



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While pricing has widened, early indications in 2023 point to a growing return to confidence for the sale leaseback market, according to a market update report from SLB Capital Advisors.

The report cites “strong credits and robust business models achieving successful processes with large interest from investors”, even in non-core markets, particularly industrial.

Due to the current interest rate environment and companies’ overall cost of capital, the SLB cap rates offer a more attractive cost-of-capital solution than ever, according to the report.

“SLB rates remain well inside of many companies’ WACCs and today, in more cases than not inside companies’ current cost of debt financing, making the sale leaseback an incredibly attractive financing alternative,” it stated.

There continues to be an attractive value arbitrage across various industry sectors driven by the delta between business and real estate multiples. The multiple implied by average SLB cap rates (i.e., 6.25% to 8.25%) implies a multiple of over 12x to 16x.

This compares favorably to general middle market transactions which averaged 6.9x LTM EBITDA for 2022. Attractive arbitrage opportunities are generally prevalent across many middle-market sub-sectors, the report said.


Source:  GlobeSt.