If there were one phrase to describe the mood at this year’s ICSC in Vegas it would be “cautiously optimistic”. People, especially those involved in any aspect of net lease, realize demand is high, cap rates compressed, and no material change seems to be coming. However, everyone is also still very aware of the previous recession – leading to prudence being practiced on most levels. While cap rates for many transactions have returned to pre-recession levels, net lease professionals are operating with a cautious, post-recession mindset.
Although tenants are more active, the increased impact of online retailers has forced them to evaluate their long term real estate presence. This comes on recent news of various retailers – Best Buy, Circuit City, Borders, etc – being hampered and bankrupted by the effect of online retailers. As a result, many big box retailers are opting for smaller store formats and if they can – an increased focus on perishable goods. Other popular tenants such as Walgreen’s, Dollar General, and CVS have also expanded their staple product selection. These items are generally considered resistant to both economic downturns and online competition.
That said, the interest in new development opportunities has been incredibly high. Investors are showing heavy interest in high quality net lease properties and the current drought of them on the market has led to interest in new opportunities. As a result many developers are working with tenants who want new sites – a trend that is expected to gain momentum. High investor demand is also leading to an increase in sale leasebacks. Tenants are taking advantage of the high prices being offered for net lease assets to inject cash into their core business. The cash many investors held on the sidelines is increasingly finding ways into the market.
Overall, it seems like everything is moving in the right direction. From new developments to sale leasebacks, the net lease market is witnessing increased activity. However, the emphasis on due diligence and mistake avoidance is higher than ever. Everyone wants to avoid decisions that could be catastrophic.
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