Net Lease Is Great Return for REITs in Particular
Part 1 of 2
LOS ANGELES—REITs in particular need to deploy capital to achieve attractive returns for their investors and net lease allows them to do just that. That is according to Matthew Berres, a VP at JLL, based in Los Angeles. Check out the Q&A below for more on the subject.
GlobeSt.com: Net lease activity in Q2 was driven by REITs along with institutional investors – what’s the appeal to these groups?
Matthew Berres: Around 2001, single tenant triple net lease transaction volumes totaled around $10 billion because the space was an unknown, niche area. However, after becoming more familiar with the sector investors realized the benefits of its lease structure, which eliminates landlord risk and allows for simpler management.
REITs in particular need to deploy capital to achieve attractive returns for their investors – net lease allows them to get a significant amount of capital out the door, secure a blended mix of returns and gain presence across many markets.
GlobeSt.com: Any other main drivers for investors you’d like to touch on?
Berres: Another main driver for investors falls in the triple net lease space – the 1031 exchange investor. Think about it in terms of an apartment owner: say they own for 30 years but after time want to get away from the day-to-day maintenance of the property, while still enjoying returns, they can opt for a 1031 exchange to pursue an investment in the triple net space with limited landlord responsibilities. The investor is able to avoid capital gains tax by utilizing the benefits of the 1031 Tax Exchange Code, whereby the investor must invest in a “like-kind” asset with the proceeds from sale in a defined period of time.
GlobeSt.com: We’re seeing office net lease investment rise in secondary markets and outpace primary markets activity—a reverse of the historical investment trend. What do you think is the reason for this change?
Berres: It’s all about chasing yield. On average, for every $5 of demand, there is $1 dollar of supply in the market, and this is causing cap rates to compress to record lows. Investors have to go to secondary and tertiary markets for yield that they typically found in primary markets, proving investors are confident enough to take risks and look beyond investment grade properties. All of this is leading to higher yields.
Check back with GlobeSt.com in the next day or so, where we chat more with Berres on the net lease market, what markets are catching investors’ attention, an increase in foreign investment into the net lease sector and much more.
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