For every action there is a reaction. If things are bad for one, they have to be good for another, right? The same principle applies in the world of investment real estate. We have all read about the developers and owners of commercial real estate that are undergoing tremendous financial pressures with some being forced into bankruptcy.
So what happens to their real estate? Well, the owner or lender puts it on the market at a discount to attract a solid, mortgage worthy buyer who can perform quickly and close a deal.
Unfortunately, you as an individual investor or partnership will never see these deals because they typically involve several properties valued at several millions of dollars. And why would you want them? If the current owner can’t sustain them what magic can you perform?
Net Leased Real Estate
However, there is one asset class that is outperforming the market that should be at the top of your list. I am referring to net-leased properties such as drug stores, bank branches, auto parts stores and dollar stores. As many retailers are struggling to stay open these retailers are defying the trend and are some of the most solid performers today. And the prices for these assets are being lowered to attract investors.
For example, asking capitalization rates for a fairly typical Walgreen’s Drug Store twelve months ago were in the very low sixes. On the first of January of 13, the asking prices were pushing the seven cap rate range, with some higher. Translating that into a sale price, what was being sold a year ago for $6,100,000 can be purchased now for $5,360,000. Same tenant, same credit.
The credit crunch has triggered widespread re-pricing in all sectors of the real estate industry. In general, the market has witnessed Class A property cap rates increase by 25 to 75 basis points while B and C property cap rates have climbed 50 to 150 basis points. For buyers of newly constructed net-leased properties with 10 plus year leases to credit tenants, well-capitalized buyers are finding that this is a great time to invest in net-leased properties.
When considering the purchase of any commercial real estate investment property you must ask yourself one critical question – what are my management responsibilities in terms of time and physical effort? With a net-leased property the tenant pays all, if not most of the expenses making the properties next to management free.
If you are a professional without the time or inclination to devote to your real estate investment but at the same time understand all the benefits of owning real estate, it should be pretty obvious that this property type suits your lifestyle.
Very simply stated, prices are coming down for even the best real estate, and net-leased real estate properties offer the investor a conservative investment strategy. These are properties with long term leases with credit tenants in good locations and no management headaches.
Hasan Merchant
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