Shopping Center Business

MAY 2018

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NET LEASE 106 • SHOPPING CENTER BUSINESS • May 2018 ginning to quietly re-engage previously interested buyers with sweetened deals. That typically marks the start of a broader re-pricing process, he adds. In some cases, sellers preparing to go to market are nudg- ing up cap rates by a quarter of a percent- age point in anticipation of more central bank tightening, says Sean O'Shea, a man- aging director for the O'Shea Net Lease Advisory group of Los Angeles-based BRC Advisors. O'Shea and other experts contend that seller and buyer motivations as well as in- vestor types are influencing the market, too. Climbing interest rates have a neg- ligible effect on 1031 exchange buyers and other investors that use all or mostly cash, for example. In fact, 1031 exchange buyers looking to defer capital gains taxes on sale proceeds face a 45-day deadline to identify a new investment property. That pressure makes them more willing to pay a premium for net lease assets, which has also helped to keep a lid on cap rates, bro- kers say. But higher interest rates directly impact private equity funds and insti- tutional buyers that typically use leverage to finance deals. Even REITs, which generally try to keep their debt loads at around 50 percent or less of net asset value, are "very sensitive" to inter- est rate changes because of shareholder yield expectations, Chichester says. "Therefore, those expectations are go- ing to influence pricing, and you're seeing a gap building between different buyers as to what they'll pay for single-tenant net lease properties," he explains. "A private buyer can still be aggressive while the REITs are more disciplined and expect- ing cap rates to move up a bit." Buyers that need to use only 50 percent debt are finding it difficult to make deals work on properties with a cap rate of 6 percent or be- low in today's interest rate e n v i r o n m e n t , O'Shea points out. In some cas- es, investors are taking out cheaper short-term loans, but they then run the risk that interest rates will be substantially higher when it's time to refinance. "While short-term debt may improve yields by 30 to 40 basis points, where are you going to be in the next three to four years?" he asks. "If you have no require- ment to buy anything right now, keep your powder dry and see where the market is at the end of the year." SCB Sean O'Shea Managing Director O'Shea Net Lease Advisory RELATIONSHIP DRIVEN | RESULTS ORIENTED Thank You to all of Our Clients, Partners, Colleagues, Family and Friends for Making our First Year at Encore a Success! $506,596,995 Sales Volume 191 Properties Sold Walgreens - Clearwater Beach, FL DaVita – Washington, D.C. Sherwin Williams – Hayward, CA Crossmark – Bentonville, AR McDonalds – Westchester, NY Chase Bank – Muncie, IN CVS - Austin, TX Starbucks – Suwanee, GA Firestone – Clermont, FL Encore Also Recognizes The Following Charities & Organizations That We Have Proudly Donated To: - Multiple Youth Sports Organizations - Oholei Torah Community Center - St. Nicholas Greek Orthodox Church & National Shrine - Judith Dianne Jackson Scholarship Fund - Holy Dormition Monastery - St. John Greek Orthodox Church - Annunciation Greek Orthodox Cathedral - Ronald McDonald House - Friendship Circle - Hatzalah Volunteer Ambulance - Chabad of Riverdale - Boys & Girls Club of America - St. Thomas Chaldean Catholic Church - St. Jude Children's Research Hospital 30500 NORTHWESTERN HIGHWAY SUITE 400 | FARMINGTON HILLS, MI 48334 | ENCOREREIS.COM 25 Investment Brokers Sold in 34 States Rite Aid – PA,NY,NC,SC,MI,OH Advance Auto Parts – MI & KY Dollar Stores – MI,IN,TN,NC,OH,PA Brandon Hanna Managing Partner 248.702.0290 bhanna@encorereis.com Deno Bistolarides Managing Partner 248.702.0288 denob@encorereis.com Ryan Vinco Managing Partner 248.702.0299 ryan@encorereis.com Will Pike Executive Vice President Managing Director CBRE

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