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April 01, 2020  

In Stalled Market, Slight Glimmers of Hope

Eyeing a mostly frozen investment-sales landscape, optimistic pros see some green shoots.

They point to the relative safety of net-lease properties, the expected return of foreign buyers, and brokers making quiet pitches to select investors as positive signs that listings and deals, while sparse, will continue to emerge in the coming weeks.

The launch of a sales campaign for an Apple store near Los Angeles, which could fetch $100 million, and the planned roll-out of a Dallas office complex valued at some $750 million are seen as examples that the market isn’t completely closed (see articles on Pages 2 and 3).

“If I put pencils down every time [investors] are taking a pause . . . I’d have 30-40% less transaction volume over my career,” said one acquisitions pro at an insurance company. “I’m still looking for stuff — but there aren’t a lot of people raising their hand.”

Net-lease property sales could benefit from investor caution in a time of economic turmoil, brokers said.

“It’s the leases that go on for 15 or 30 years . . . that are going to really thrive in this environment,” said Camille Renshaw, founder of net-lease brokerage B+E, who compared those long-term contracts to corporate bonds.

The sector was in the midst of an historic upswing before the coronavirus crisis hit. Some $77.5 billion of single-tenant office, industrial and retail properties sold last year, according to CBRE, setting a record for the second year in a row.

Such properties become even more attractive when investors are seeking stability with relatively high yield, said Will Pike, a vice chairman and head of CBRE’s net-lease team. “When you compare net-lease returns to the volatility in the corporate bond market right now, it makes the sector even more attractive,” Pike added. “When the dust settles, the net-lease sector will receive an even larger percentage of institutional commercial real estate capital.”

Pike said CBRE continues to roll out new net-lease listings “selectively,” with a focus on tenants that are holding up well in the crisis, such as online retailers and grocery stores. “We’re focusing on the more commodity product, backed by [companies] that are performing well in the public markets despite the recent instability,” he said. “If it’s a flight to safety from an equities market that is down 25% — why would we not take an offering out on a triple-net-lease basis if it offers a superior risk-adjusted return?”

Renshaw noted that the inability to conduct property tours amid coronavirus lockdowns — an obstacle to many sales campaigns — is less of an issue for net-lease sales. She estimated that roughly one-third of the buyers she’s worked with in her career never toured the net-lease real estate they bought.

“It sells much more like stocks,” she said. “We spend substantial time underwriting the credit, the lease documents and the historic third-party property reports. There’s not that much to know about that Starbucks in Atlanta. You’re picturing it now, and that’s what it looks like.”

Another source of hope for a sales revival could be the return of Asian investors, many of whom were sidelined late last year and early this year as coronavirus first struck that region of the world. Some of those buyers are back in their offices, and may soon be back in U.S. bidding pools.

“Asian investors haven’t done anything for two months,” one veteran sales broker said. “But they are back, and you get a sense there is a big desire to move into dollars and U.S. real estate . . . Many of them think this may be a six-week opportunity to distinguish themselves without competition from U.S. or European-based capital sources.” But, he added, “They won’t buy indiscriminately. They will buy the best of the best.”

Most likely, they wouldn’t be bidding for widely marketed assets — because there won’t be many in the near term. Pros say deals are more likely to happen off-market.

One major East Coast broker said he wouldn’t launch a full marketing campaign in the current environment — but he is still selectively pitching deals to investors who say they want to buy.

Even those investors are being cautious, the broker said. “There are people that if they have $100, they’re playing with $5, $7. They’re not playing with fire. They’re looking to see what they can do,” he said. “We are collecting investors who are calling us and saying, ‘This is what we want to see.’ ”

A high-ranking West Coast broker said off-market pitches can match opportunistic buyers with assets, without blasting out teasers that most acquisition pros would ignore today. “My instinct is that the key to getting something done is to have a buyer who is both motivated and entrepreneurial,” he said.

For example, that broker said, his firm is currently working on a deal for a buyer seeking to complete a tax-deferred exchange under Section 1031 of the IRS Code. “His plan for due diligence is to have his consultants get on his private jet, land at a small airport nearby, do their inspections and then fly home that day,” he said. “If you are an institutional group, you probably never come up with a plan like that.”

Anecdotes like that are prompting brokers to test the waters.

“We plan to launch two deals using a private-placement strategy,” said the veteran advisor. “It is a targeted marketing campaign, reaching out to a handful of buyers, to see if we can find someone who may have a 1031 exchange, or foreign investors looking for an opportunity.”

But green shoots are just that — and only completed trades will show whether they blossom.

“If I have a deal that’s unique, we’re going to show a couple of people,” the East Coast broker said. “It’s going to be interesting to see if we can get them done.”