Shopping Center Business

MAY 2015

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292 • SHOPPING CENTER BUSINESS • MAY 2015 lease transactions in 2014, up substantially from 42 percent in 2013, according to the Boulder Group. Meanwhile, Marcus & Millichap predicted in its Net-Lease Out- look report for the first half 2015 that 1031 exchange buyers would dominate the net lease market in 2015. In particular, Mar- cus & Millichap predicted that apartment- owning retirees would take advantage of investment demand for multifamily prop- erties to exit the sector and plow the pro- ceeds into retail net lease deals. "The landscape has been changing over the last 18 months or so as more private investors have gotten involved in the net lease market," says Shipman, who has overseen some $50 million in property in- vestments since PECO launched its Real Estate Income Fund in 2012. "Generally that's a signal that the economy is health- ier because banks are back to lending to private investors at rates that only larger institutional investors could take advan- tage of during the down cycle." But affordable financing and com- pressed cap rates are convincing some buyers to take on renewal, location or refinancing risk, O'Shea says. That's espe- cially true of a growing number of private investors without real estate experience. They largely see net lease properties as commodities or bonds that generate sta- ble income in the short term but they may not be prepared for a vacancy or other setback, particularly if a tenant only has a few years remaining on the lease, he maintains. Even tenants considered virtually bul- letproof can throw net lease landlords a curve. Walgreens in early April an- nounced that it would close 200 stores — about 2 percent of its locations in the U.S., Puerto Rico and U.S. Virgin Islands — as part of a measure to cut $1.5 billion in costs by 2017. Dedicated real estate investors typically enter transactions with long-term goals and ideas about other users in case of difficulty, O'Shea notes. Additionally, while many private inves- tors are squeezing out more yield by tap- ping five-year debt, which typically carries a lower interest rate than loans with lon- ger terms, smarter investors continue to take out mortgages for 10 years, O'Shea explains. "I always ask people, 'If you're buying something at a 6 percent or 6.5 percent cap rate with an interest rate in the mid- 4 percent range (and a five-year term), do you think interest rates are going to go up 200 basis points over the next five years?'" he says. "Nobody really knows, but experienced practitioners say it could easily go up 200 basis points." Private buyers also are moving up the price curve, Fritz adds. Private investors have historically showed most interest in net lease properties priced around $10 million or less, while deals of around $20 million were largely the exclusive domain of real estate investment trusts and insti- tutional investors, he says. But recently he marketed a $40 million property and was surprised to see an equal amount of interest from private and institutional investors. "I would have never expected that a couple of years ago," Fritz says. "I think a lot of it is being driven by debt — more and more lenders are willing to take on risk because they have to get money out the door." On the institutional side, investment managers also need to put a crush of capital to work, which is leading to ques- tionable deals, warns Paul Domb, asset manager and vice president of Miami- based United Trust Fund. He sees his- tory repeating itself only six years after the Dan Frey - 512.682.5507 Billy Osherow - 512.682.5558 OPENING SUMMER 2017! Freedom Crossing at Fort Bliss FREEDOM CROSSING AT FORT BRAGG In† roducing Visit FreedomCrossingatFortBragg.com F A Y E T T E V I L L E , N C First dine-in movie theater in the Fayetteville market Restaurant spaces with abundant outdoor seating wrapping a lush village square common area Outdoor complex that will serve as Fort Bragg's new town center Access to more than 263,000 active & retired military personnel/families Second project in the Freedom Crossing portfolio - following Fort Bliss

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