How do NNN assets play a role, as a bond-equivalent investment, in an uncertain environment, like 2018-2019?
Contributing Author: Sean O’Shea – The O’Shea Net Lease Advisory
We are always told that ‘Asset allocation’ is critical to your Investment Portfolio. This is true for your real estate portfolio, too. NNN assets can play a role; but your selection criteria needs to be is more than, merely, debating cap rates, in our experience. We have stated in a number of prior Net Lease Blogs, “Not all NetLease properties are the same”. This has never been more true.
The supply of these NNN properties has improved, significantly, since 2009-2010 Great Recession period; and we have a decade of low interest rates, the result of the Federal Reserve policies, with rates gradually moving upwards with rates increasing the margin of error due to very, very thin ‘spreads’. Cap rates going up; not down, as we have had the luxury of low rates in the last ten years. It covered a number of potential miscues…The Market is, now, changing; and extra care is required for best investor results.
This decade of compressed cap rates and dramatic value accretions has accrued to real estate investors who have benefitted in this extended period with low rates and without a recession. Admittedly, this has been a slower recovery than prior ‘cyclical recessions’, which have historically lasted 24-30 months. This was a “structural recession” demanding unprecedented Fed actions; and it has taken ten full years to climb out of that financial crisis. This is not a normal environment; we cannot be lulled into complacency after these last ten years.
I am not trying to sound a sour note, not at all; but we might wish to consider, going forward, if consumer spending determines roughly 69% of our economy; and our aging population of Baby Boomers are a 26% factor of the population with 10,000 citizens turning 65 years of age, every day; what are the implications for real estate?
We acknowledge that our economic recovery is finally “real”. We do have much lower unemployment (under 4%), terrific; and record Stock Market valuations, just great; but, is this truly sustainable at a 4-6% GDP, as some optimistic supple siders assert is the new normal, in the face of the staggering Federal Deficits?
Question: What is your best defensive strategy for a “Buy and Hold Scenario” that affords a steady, predictable, risk-averse income streams? Net lease assets can be a solution; but, once again, “ Not all Net Lease properties are the same”.
Is it not more believable that this aging demographic, which controls 50% of the nation’s wealth (according to Deloitte Consulting) is more likely to allocate money into investments; rather than goods and services?
This is good news for the Real Estate Sector; but your ‘asset allocation’ is key since, “ Not all Net Lease properties are the same”, admittedly, our continuing mantra as Net Lease Advisors.
So, if the two principal risks, as we view them in real estate investment are:
- Releasing Risk; in the event that a Tenant does not exercise a renewal option; or the Tenant goes out of business; or during a recession that Tenants pull back on their bricks ‘n’ mortar strategies
- Re-financing Risk: if no loan or leverage, much less risk, clearly; or in the event of maturing loan, does the remaining Tenant lease term and Tenant credit worthiness, allow you a solid loan refinancing execution
How do we look at these net leased assets, as a potential solution?
When you are meeting with your accounting and investment professionals in this uncertain investment environment, how does real estate; and, in particular, Net Lease assets, play their appropriate role as an alternate to fixed income investments, providing stable, predictable income streams, like a bond portfolio?
While the historical: “Location; Location; Location” is still important issue for an ‘illiquid’ hard asset; additional issues like the tax-free considerations of that jurisdiction is why states like Texas, Florida, Washington, and Oregon have received a strong market response, when we search our 80,000 NNN database for Clients.
An investor, seeking a safe haven, as a Bond diversification, must also, consider:
- Tenant Credit;
- Actual structure and term of the lease; and any escalations and renewal options to determine the holding period;
We must review and evaluate, what level of risk am I assuming, not the representations of a Listing Broker’s glossy brochure; but what lies beneath the marketing hyperbole?
So great care and a well-informed review, based on acute market Intel, should be the foundation for your investment portfolio.