Triple-Net Properties See Tough Market
An interview with a leading NNN/1031 executive leads some insight on the market.
Interview by Randall Shearin

Shopping Center Business recently interviewed Harold Briggs, executive managing director of Tulsa, Oklahoma-based Stan Johnson Company, to see how the market for triple-net properties is faring in the current economy.

Stan Johnson Company executives Stan Johnson, Phil Baxter and Harold Briggs.

SCB: What is the climate for triple-net/single-tenant properties today?

Briggs: It’s a tough market today. There is still a significant bid/ask spread between buyers and sellers. Additionally, there are fewer 1031 exchange buyers in the market right now. These factors are making it far more difficult to get deals done. At this time last year, we probably had five offers for a typical listing and we probably have one or two good offers for that same type of listing today. With our experience with net lease properties, we continue to get these deals closed. Our business has actually been quite good considering the challenges we have all faced in Capital Markets. We had an incredible year in 2007 setting another all-time high in sales volume for the company and we’re projecting that our 2008 sales volume will be significantly better than most industry reports that we continue to hear.

SCB: What markets are hottest for development of single-tenant properties? For investment?

Briggs: We do business across all markets in the United States. Markets with growing market fundamentals and strong economies are the hottest in terms of development. I’d say that Texas is a pretty hot market both in terms of the single-tenant new development as well as investors chasing deals. Most major markets in Texas are experiencing strong development activity — Houston, San Antonio, Austin and Dallas.

SCB: What retail tenants do buyers like to see in the buildings?

Briggs: There has definitely been a flight to quality in terms of the types of deals getting done. This is largely driven by the fact that it’s difficult to secure attractive financing on some of the lesser quality credit tenants. Buyers can still secure reasonable financing on investment-grade tenant opportunities.

SCB: Is it more difficult to sell a single-tenant property in a third-tier market than a primary or secondary market?

Briggs: Absolutely, but it can still be done. Over the last 3 or 4 years, there really hasn’t been much of a cap rate spread between primary markets and secondary or tertiary markets. With the changes we’ve seen over the last 6 months, we’re now starting to see spreads. I think it’s still too early to call out those spreads but we believe they exist and will exist for quite some time. The other common thread now is that investors are looking for name recognition. Both the tenant and the town need to be known by the buyer and by his lender.

SCB: What retailers like single-tenant buildings in today’s economic climate? Why?

Briggs: The economic climate today doesn’t really drive most retailers’ appetite for standalone facilities, rather it’s a question of whether to lease or own. In a capital constrained environment, we continue to see companies that want to monetize their assets via sale/leaseback structure and pour that capital back into their core operations. Retailers are no exception. They realize they can make a better return off their core business than they can in owning their real estate. We see it with the big-box retailers as well as the drug stores, auto related businesses, sporting goods companies, and many others.

SCB: Who is the prime investor in these properties today? Has demand fallen from the investment side?

Briggs: Demand for net lease properties has definitely fallen off like it has with other product types. First, you have the reduction in the number of 1031 exchange buyers in the market today. We also have many buyers standing on the sidelines waiting for the bottom of the market to hit so they can catch a great deal. They have money to deploy but don’t want to jump back in too quickly and overpay for an asset they might buy later for less money. Finally, the highly leveraged buyer is completely out of the market today. All these factors suggest that there are fewer buyers that are truly in the market and they have better choices than they had a year ago. In terms of who the prime investor is today, I’d say it’s the 1031 trade buyer that either has realistic financing assumptions or who is an all-cash buyer.

SCB: What’s your typical deal?

Briggs: We’ll do deals ranging in size from approximately $1 million to $100 million this year. I don’t know that I would say that any of them are really the typical deal. In the retail space, I’d say our sweet spot is a deal ranging from $3 million to $6 million in size. We continue to get these deals done with all-cash exchange buyers. As deals go above $6 million, we face the challenges of securing attractive financing on behalf of our investors. Right now, we have several good credit deals with reasonable lease terms in good real estate markets but that are much larger in size and they just aren’t moving as fast. This larger deal size greatly reduces the pool of potential investors willing and able to get the deal done.

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