Last month, Shopping Center Business asked Ralph Cram, COO of Envoy Net Lease Partners, to peer into his crystal ball and share what's ahead this year for the net lease retail sector. Following are selected excerpts:
What's ahead this year for the net lease retail sector?
"Overall, we think 2014 will be better as more new properties come to market, though we doubt there will be enough new supply to change pricing for Class A net lease properties. Near term, we think the greatest impact for the retail sector is likely to be higher interest rates, which will effect lower quality net lease properties as buyers trade up to properties with longer lease terms."
With the increased institutionalization of the sector, how difficult is it for individual investors to find properties?
"The REITS are now pushing the one-off, high-net-worth investor out of the running for investment grade net lease properties — driving them into the “scratch and dent market,” i.e., investment grade properties REITs have rejected (such as those with short lease terms or locations with poor sales) and forcing them to lower their tenant credit standards or purchase specialty purpose properties like restaurants or daycare centers. These days, individual investors who want to avoid taking on additional risk have focused on purchasing investment grade properties with lower yields that REITs won’t touch, like ground leases (McDonalds, Chase Bank)."
Geographically, where are you seeing properties trade?
"A few geographic trends are developing. First, we’re seeing the dollar store chains filling out the southwest and western regions and, secondly, retailers are currently following population and disposable income growth in the oil states from Texas to North Dakota, which are both doing very well. We also like Pittsburgh, which has seen good employment and disposable income growth since 2010 and has limited land available for development due to geographic constraints. Outside of that, the demand for South Florida net lease properties is hot but at the moment developers are having a hard time finding affordable sites they can develop."