Sole proprietor owners rush to list sites for sale as interest rates rise


Rising inflation is causing an influx of single-tenant commercial properties on the market after the number of sales fell in the third quarter, a marked change from the first half of the year.

The dynamic raises uncertainty about whether sellers can get deals that match their price expectations, according to brokers and investors specializing in net leasehold properties. Meanwhile, buyers may now be more willing to wait and see which way the economy goes.

Under net lease arrangements, tenants are responsible for many building-related expenses. The rising rents embedded in these agreements have traditionally provided landlords with protection against inflation and rising costs. The spike in properties in the market indicates that protection could be seen as weakening.

The average selling price per square foot is now well off its peak in the second quarter of 2022, according to data from CoStar. In addition, the number of buyers willing to make an offer and the number of sellers willing to accept lower offers are decreasing, investors say.

The backdrop to the increase in the number of listed net rental properties and the decline in sales volume and prices is the Federal Reserve’s decision to raise borrowing costs for banks in an effort to rein in the ‘inflation. The Fed’s last action came on September 21 when it raised rates by 0.75%, bringing the total hikes to 2.25% this year with the possibility of two more rate hikes before 2023.

Rising interest rates over the past six months have been a shock to commercial real estate and have shifted net rental investment from a seller’s market to a buyer’s market Aaron Baum, co-founder and director of acquisitions at Detroit-area-based One Family Property, CoStar News said in an interview.

One Family has acquired more than $120 million in net leasehold properties over the past two years and has set a goal of acquiring up to $200 million per year going forward.

“Markets don’t like uncertainty. They want stability and they want predictability,” Baum said. “And that’s what this economy is missing. People are a little worried or worried about the next 36 months. If they were sellers [in the past]they would certainly be more sellers now rather than waiting for the market to improve.

This is especially true for individual net-leasehold owners, Baum said. If these people are planning to retire in the next five years, maybe even 10 years from now, they are now planning to be at the top of the seller’s cycle.

B+E, a New York-based investment brokerage firm specializing in net-to-let real estate, is seeing the same dynamic.

“The feeling is that these increases will be the tipping point for the price peak and all-time high. [rates of return] we’ve seen in the market,” B+E noted in a report last month. “We are already seeing the effects of this, as lenders require borrowers to bring more capital to the table: transactions that previously required a 75% loan to value, are now around 55% to 60% loan to value. the value.”

The first half of the year saw strong net lease sales with $10.2 billion of activity in the first quarter and $11.1 billion in the second quarter, according to CoStar data. That figure fell to $6 billion in the third quarter.

“Volume is slowing primarily due to rapidly rising interest rates and ongoing price discovery,” Randy Blankstein, president of net rental brokerage The Boulder Group, told CoStar News in an email. “Aggressive amounts of net lease owners have been putting properties on the market in recent weeks as many decide to sell rather than refinance at these interest rate levels.”

CoStar data shows 11,637 single-tenant properties for sale from one to 90 days, indicating they came on the market in the third quarter.

By comparison, there were about 9,700 such properties in the second quarter.

The average selling price per square foot of net leasehold properties sold in the third quarter fell to around $227. That’s down 18% from the second quarter, when prices peaked at around $278 per square foot.

Rising rates and relatively high inflation have affected investors’ acquisition criteria for net rental properties, according to Blankstein.

“Investor demand for properties with rent growth or the ability to increase rents in the short term is the most in demand,” he said. “As a result, demand for properties with limited or no rent increases is limited to properties with above-market yields or strong underlying real estate.”

There are, however, sellers willing to test what prices they can achieve in the current market.

7-Eleven at Peabody Square in Dorchester, Massachusetts, is one of about 70 stores the retailer has put up for sale primarily in the Northeast. (Costar)

Convenience giant 7-Eleven is looking to sell 73 locations in 22 states, most of them in New York, New Jersey and Pennsylvania. Many of the properties were acquired two years ago in a $21 billion mega-deal that added 3,800 Speedway convenience-gas stations to its portfolio.

NRC Realty & Capital Advisors markets the sites, the majority of which “7-Eleven has determined do not meet its current business plan,” said Evan Gladstone, executive managing director of the real estate and financial advisory services firm. , to CoStar News. “They are sold without the 7-Eleven franchise with a current gasoline brand.”

Baum of One Family is also among the companies increasing sales listings. The company has a dozen properties on the market, many of which were acquired as part of a portfolio purchase of 29 properties just seven months ago.

“We take opportunities where they seem to fit,” Baum said. “If we bought something for $1 and we think we can sell it for $1.50, to people who call and say, ‘We want to buy your property’, we say, ‘Everything is for sale, give me a price”.

Even though transactions and sales volume slowed in the third quarter, that doesn’t mean there aren’t any buyers, according to Baum and Gladstone.

NRC’s Gladstone said it expects “spirited bids” on 7-Eleven properties based on more than 1,400 responses the company has received so far with a deadline in less than a month. a month.

However, not all sellers can expect multiple buyers to compete for their properties. If there were five buyers before, there may only be one bid now, Baum said. And sellers can refuse this offer if it does not reach their goal.

Baum added that there are still buckets of capital to close deals in the traditional high time of year for net rental investments.

“Brokers will tell you that 40% to 50% of the volume is in the fourth quarter, and I think you’ll still see a lot of buyer transactions before the end of the year,” he said.

Despite the rising cost of capital in the market, many players need to deploy cash by the end of the year, according to B+E. First- and second-quarter sellers who were looking to exchange their investments through tax-efficient sales have 180 days to find a replacement property.

And some funds also haven’t fully spent the capital they raised for spending in 2022, indicating there could be an uptick in sales, B+E said.


Comments are closed.