Southeast Net Lease To See More Sustainable Growth
ATLANTA—While large portions of the U.S. are feeling the squeeze of low cap rates, Southeast net lease is on a hot streak, and nowhere is that more evident than in Atlanta. So says Joey Odom, regional director of Stan Johnson Co.‘s office here. We met up with this 2014 Real Estate Forum “Fifty Under 40″ recipient to get his reading on the current net lease retail environment, as well as what he’s looking for in 2015.
GlobeSt.com: How would you describe the state of the net lease retail market nationally and in the Southeast?
Joey Odom: The theme remains the same, with cap rates at historic lows due to the imbalance of demand over supply. While interest rates certainly play a role, supply and demand still rule the day. Case in point: when the 10-year treasury moved up 100+ basis points in just a few months in mid-2013, cap rates held firm and even compressed in many cases. The low amount of supply has forced many buyers to adjust acquisition criteria, for example, by buying shorter term leases, tertiary markets. As a benchmark, we are seeing 15-year Walgreens deals trading at cap rates 50+ basis points lower than where 25-year Walgreens were trading in 2007, when cap rates were at a then-historical low. The X factor in this equation will be how active the large net lease buyers—the “market makers”—are in 2015. Assuming those acquisition appetites are still large, it would be reasonable to expect cap rates remaining in the same range.
Regarding interest rates, while everyone expects interest rates to increase in mid to late 2015, that may not necessarily correlate to higher cap rates in the near term. Properties that are not typically subject to financing ($3 million and under) will still have a large number of bidders, largely individual investors/1031 buyers, and will likely remain unaffected for the short term.
In the Southeast, we are seeing more activity than ever. From a tenant standpoint, the typical cast of characters are leading the way—Dollar General, Family Dollar, bank branches, etc.—with other tenants like Hobby Lobby, Academy Sports, LA Fitness, Mattress Firm and Wal-Mart Neighborhood Market expanding rapidly and gaining more and more favor from the investment market.
GlobeSt.com: What are you goals for Stan Johnson Company’s Southeast region in 2015?
Odom: Succinctly, we are focused on sustainable growth. In such a robust market it would be easy to grow rapidly and reduce the filter through which we hire or the way we represent our clients. We aren’t just focused on 2015, we are focused on growth for the next 15+ years. We are also continually asking ourselves how we can represent our clients more effectively so we are looking at how we further segment the net lease market to continue to be deep subject matter experts. In the Southeast, we will continue to add experts in sub-niches in the net lease industry like medical, office, industrial and even divide the retail market into smaller niches such as drug stores, big box, ground leases, etc.
GlobeSt.com: What challenges in the net lease retail market do you expect in 2015?
Odom: For developers, the challenge will continue to be not only sourcing developing opportunities but sourcing development opportunities that provide an attractive spread between build cap rate and sale cap rate. Tenants have continued to squeeze build cap rates to a level that does not make sense for developers in some cases, so locating the “right” development opportunities will be the challenge for developers.
For buyers, in a product-constrained market, the challenge will continue to be locating product that suits their needs, whether that need is tied to geography, yield, security, etc.
For brokers, the challenge will be continuing to provide value to their clients in this seller’s market. One form this can come in is market intelligence—Stan Johnson Company is fortunate that our focus is 100% net lease and that we have such a large machine behind our team of 65 nationwide brokers. What this means to our clients is that everyone in our shop is contributing to the same database, is sharing up-to-the-minute comps, etc. We are able to provide real-time market data to our clients that is otherwise difficult and segmented information.
Additionally, in this market, many sellers are inundated with inquiries on development projects from buyers and brokers, which leads them to believe they would be better-suited to sell the property without representation. When we have an opportunity to talk this through with a seller, we are able to help them understand the value of allowing us to conduct a broad, nationwide sale process. Rather than just accepting the first offer that comes in the door, our clients see the value this process creates by including all possible bidders and conducting a competitive bid process, which ensures maximum sales proceeds. Stan Johnson Company is able to leverage the largest and highest-quality net lease database (which is so high-quality because all of our firm contributes and shares this data internally, rather than all of our brokers maintaining separate databases) to accomplish this goal for our clients.
GlobeSt.com: What advice do you have for investors of net lease retail properties in 2015?
Odom: My advice is to understand the market we are in and adjust your approach accordingly. If a recurring buyer, building trusting relationships with the brokerage community that provides confidence that you will perform is critical. If a one-off buyer, while there has to be a line in the sand on price, don’t allow 5 to 10 basis points to deter you from purchasing the property that really fits for you. We have seen too many buyers lose out on deals they really wanted because they did not give one last push on price, which would have secured the deal for them.
GlobeSt.com: How can an investor assure that he will chosen when bidding on a property in today’s competitive market?
Odom: This is a great question and there are definitely things that can help set buyers apart. Assuming near-equal prices, it is paramount for a buyer to be fully disclosing on their situation and qualifications. This typically means a willingness to provide proof of funds, (if they are in a 1031 exchange) a 1031 designation form showing the subject property has been identified, (if they are using financing) a rate sheet from a qualified lender, etc. Additionally, the most important non-financial term a buyer could use to enhance its position would be the duration of a due diligence period. An equally-priced, equally-qualified transaction would naturally move to the buyer with the shorter inspection period. There is more demand than supply and the buyers who understand that dynamic and tailor their approach are much better positioned to be awarded deals.