Investments: Net-lease real estate: The current state of the unique market

Net-lease real estate is still a unique market and evaluation can be precise and different from traditional real estate. Retail: The retail sector of net-lease is the most visible; these single-tenant structures seem to be the mainstay of America's byways and highways. For a variety of reasons, these net-leased retail stores are the most actively traded sector. Retail net-lease properties range from drug stores to bank branches, auto parts stores to fast-food eateries, and grocers. Due to the high volume of these stores, and the generally low price point on the whole, this sector of net-leasing is most vibrant. Among the hottest properties now are discount retailers such as Dollar General and Family Dollar. These two companies are building/opening close to 1,000 new stores a year, substantially adding to volume. Dollar General has maintained positive growth and investment-grade rating, leading investors to expect new construction pricing in the 6.25 to 6.6 cap range. Family Dollar, while not as large or financially strong, is currently pricing in the high 6 to mid 7 cap range. Price points for stores will be from $1 million to $3 million. For investors looking for a more secure company, Walgreens and CVS are readily available. Though both stores are producing far less new locations than the discount retailers, there is still a steady flow into the market. Both companies have strong investment-grade credit rating and usually have a base term of 25 years. Investors should expect cap-rates in the 5.25 to 5.75 range, with some strong locations at even lower cap-rates. Price ranges for these drug stores will range from $3 million to $10 million. Industrial: Industrial properties are generally less available to individual investors due to their larger size. Ample opportunities abound, however, particularly for investors willing to go with tenants that aren't household names. Most of the industrial facilities are sale-leaseback structures where the tenant is trying to raise capital for expansion or new equipment. This purposeful leaseback generally bodes well for the strength of the company. Sizes on industrial properties can range from 5,000 - 300,000 s/f and are tenanted by companies in every sector of the economy. Cap-rates on most industrials are higher than retail and can be purchased at cap-rates ranging from 7 -10%. For an investor looking for a more branded name, the most popular property is FedEx, which has three concepts: freight, ground, standard. These locations are substantially similar to each other and trade more like retail stores. Cap-rates are generally in the mid- 6 range and range from 15,000 - 100,000 s/f. Price points are $3 -$15 million, with a few of their major hubs, 300,000+s/f, going for $30 million and up. Office: Office net-leased properties are the smallest of the three groups but often have the strongest credit, and provide an investor a property with net-lease management as well as the opportunity to reposition the asset in the near future. Most office sale-leasebacks are with large firms that are looking to strengthen the core business model, which, for most, is not real estate investing. By utilizing a sale-leaseback and generating a lump sum of cash, the company can pay down debt, buy new machinery, or expand existing operations. These sale-leaseback structures are generally for a 10-year term with options to extend the lease. As these properties are more of a "traditional" real estate play, cap-rates vary greatly from market to market and property to property. Investing in strong metros will yield cap-rates from 5 - 6.25%, while secondary markets can yield up to 7%. The net-lease market continues to be active with an increasing number of investors coming into the market both through 1031 Exchanges, as well as cash, as they seek to diversify existing portfolios. We expect prices to remain relatively stable over the next 6-12 months so long as current interest rates remain the same. As interest rates climb, we expect to see trailing cap-rate increases beginning with lower quality tenanted buildings followed by the sector as a whole. For a long-term investor, however, interest rate movement should be a lesser concern as there is ample long-term fixed-rate. Marilyn Kane is president and Sean Shanahan is CFO at Iridium Capital Group, New York, N.Y.