Time for a “NNN Up Periscope in Q2 2018” from the Great Recession of 2008-09…what is really going on


Contributing Author: Sean O’Shea

Remember, as we have stated in a number of prior Net Lease Blogs, that Not all Net Lease properties are the same”.  Never more true.

We have just completed a series of IRC 1031 Exchange Transactions, which have provided us a new vantage point:

“Where we are 10 years later” in Q2, 2018?

“Where we may be going for balance of the year 2018-2019?”

Almost all knowledgeable observers and participants in the Net Lease Sector of the real estate industry would, now, admit, that we are in the late phase of this Real Estate Cycle after a whole Decade of Recovery.   The subject matter in industry publications has changed recently.   Subjects have shifted from NNN inventories, to issues of hedging inflation for the 1st time in 10 years, to raising interest rates (and presumably cap rates) moving northward.  Some are even whispering about “A new Recession” in the predictable near term future is new subject matter. 

A candid review, might acknowledge that real estate investors have, effectively, been “subsidized” by Federal Reserve Policies over this extended period of historically low interest rates. While viewed in some quarters, as a, possibly necessary, “triage” in the face credit crunch of Great Recession, when the music had stopped.   Credit access was a very dear commodity.  Remember?

While many have been dancing in the streets, celebrating the recent Tax Cuts,  (I benefitted too, no doubt) which was welcomed by the real estate community, after much debate.  But, now the sobering reality of the new Federal Deficits, suggest a certain quality of “ADD” among our most august economic policy makers.

Those much-heralded economic gains, now, are reconsidered as pretty short term; and were allocated to the privileged few in the top, (let’s say, top 6% of taxpayers) have yet to spur the 4% GDP that was promised by supple sider friends.

So, if we are heading toward some measure of new financial crisis and recession, “In what chair, do you want to be sitting in, this time, if there is a new crisis?”

Jack Bogle of Vanguard, in a recent CNBC interview, was cautioning investors that the double digit returns enjoyed in the Equity Markets since the Great Recession in these last ten years, looking forward, more credibly, are going to be in the 3.0-3.5% range. Yikes.

So, hard assets, like Net lease properties, well located commercial assets with predictable, accretive income streams, are going to be one of the stabilizing investments to diversify from some higher yield options.

Going forward, if investors are still “Chasing Yield”, the question we now proffer, once again, to our Clients, whether Sellers or Buyers is:

“What is an acceptable risk-adjusted return for 2019 and beyond”?

These NNN assets and a minority of NN assets, with some contingent liabilities for roof and structural responsibilities for landlords, can still provide, stable income streams and residual value.   A Bond equivalent return with attendant tax benefits, too.

Are you willing to accept a modest 5-6% return as a diversification; then NNN assets are a real options and important to consider.

Your ability to identify, and then execute your investment objectives is Mission Critical.  In every completed transaction in 2018, so far, there were multiple qualified buyers for each asset.  Our ability to provide guidance to Buyers to frame offers to allow them to prevail, not just by overpaying the Sellers, but real negotiation skill sets that allowed for the best executions was really important.

As a Seller, your ability to negotiate from strength of solid market Intel to distinguish your properties is also critical. Late Phase of this cycle requires more acute market Intel than in the last ten years.

Separating the “NNN Wheat from NNN Chaff” is Job #1, for us, since net leased assets have become, somewhat ‘commoditized,’ with the sheer volume of Internet offerings. We, always, produce best Client results in a changing rate environment by having trusted relationship and solid NNN Market Intel that informs our Client’s best decisions.

Sean O’Shea, Managing Director

The O’Shea Net Lease Advisory

700 S. Flower St. #2650

Los Angeles, CA 90017

(213) 226-8719 – Direct

(213) 226-8750 – Fax

(310) 433-8851 – Mobile

[email protected]

www.nnnbrcadvisors.com

CA LIC #01438647

BRC Advisors

CA LIC #01844438