Contributing Author: Sean O’Shea
Black Swans…Fed rate raise…Recession Fears…4% GDP Hopes…Impact of Federal Deficits…Credible realty…
We often state, in an initial conversation with a prospective Client, while these Net leased assets (NNN) are now viewed as a convenient solution, which limits the management and operations responsibility for a Landlord/Investor, “Not all net NNN leased properties are the same.”
In the last ten years, these NNN assets have become ‘commoditized’. Many seasoned investors, particularly 1031 Exchange Buyers, who have a tight 45 day timeline in which to make a multi-million dollar decision to defer their substantial capital gain and secure a safe, predictable income stream imagine that you go to a Commercial Real Estate Listing Platform, like Crexi, Brevitas, Loopnet, or Leavitt Digital (LDCRE) to identify and secure their trade replacement solutions. There has, also, been a proliferation of nominal “Investment Sales Broker”, as well. With cap rates beginning to increase, and debt rates moving up as well, acute Market Intel is mission critical to distinguish the “NNN Wheat from the NNN Chaff,” as seen in NNN Case Studies.
So what’s going on in the 4th Quarter of 2018…most objective and thoughtful observers of Federal Reserve decision-making (Regrettably, excluding our President) see the measured and recent scheduled Fed rate raise, as a timely acknowledgment of our the stronger recovery (Touted by our President, daily).
After ten years with no recession, do we believe that that we will never have another recession, it would seem that the Fed needs to have some arrows in their quiver if we hit a highly predictable snag…Yes? So, raising the Fed Rate has tremendous merit on both counts. Expanding economy and future rate reserve.
So, we have been assured that the tax cuts of 2017 will attack the deficits by projected 4% GDP growth. Can the last two quarters of almost 4% growth be sustained in the face of potential tariffs and a trade war (Oh, I mean skirmish)?
On the subject of deficits, many serious economic sources, love the ‘Idea’ of ongoing 4% GDP projections (seemingly a supply-sider wishful thinking) to grow our way out of the deficits; but the ‘Reality’, today, 17 October 2018, is the reluctant admittance of an increase in Federal Deficits, one year after the much heralded tax cuts, is a documented increased $779 Billion in 2017; and $984 Billion for 2018.
So, while sunny skies abound with a tax-cut financed pair of rosy glasses, what is your best strategy to execute to provide the investment community with stable, predictable income stream with a limited risk profile…a bond-equivalent investment with some additional tax benefits?
We have just come off a decade of the lower debt rates mentioned above and the corresponding lower cap rates in this NNN sector of the real estate industry.
The most credible investment advisors and corporate managers are beginning to recast their earnings forecasts, this month, to reflect the uncertain impacts of the proposed tariffs; oil prices due to developments in the Middle East.
It will be increasingly important for investors to differentiate between the various net lease offerings in the NNN marketplace. . The supply of these NNN properties has improved, significantly, since 2009-2010 Great Recession period; but are we talking “Quantity or Quality”?
The Market is, now, changing; and extra care is required for best investor results.
Going forward, it will be imperative for investors to, at least, have ‘an allocation’ to the net lease sector; accessing the Best-in-Breed Net lease assets will be so important.
Then the ability to chart the tradeoffs of Location; Tenant Credit; Lease structure to address “management-free returns” and inflation concerns; as well as, acquiring an asset that will have value accretion over their ownership period for their best exit strategy, too.
The recent Urban Land Institute (ULI) Conference, in Boston, this month suggested a number of predictable trends. One big takeaway is that previously projected growth levels need to be revised downward. The top 80 markets in the U.S. will experience ‘a plateau’ and that means you will need to pick and choose your real estate selections with great care; not just a casual comparison; there will be ‘winners and losers’.
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.
When you are meeting with your accounting and investment professionals in this uncertain investment environment, Do Net Lease assets, play their appropriate role as an alternate to fixed income investments, providing stable, predictable income streams, like a bond portfolio?
Thoughtful deliberative review has never been more important, particularly for IRC 1031 Exchange Buyers. Be aware of the Black Swans, while they may be in the tall grass; and they are there.
Sean O’Shea, Managing Director
Los Angeles, CA 90017
(213) 226-8719 – Direct(213) 226-8750 – Fax(310) 433-8851 – Mobile[email protected]www.nnnbrcadvisors.comCA LIC #01438647