STNL Investments, What to Expect in 2019?
by George Pino
The Single Tenant Triple Net (STNL) market has been on fire the last few years, with a slew of new buyers looking to acquire a STNL.
Many of these buyers are first time purchasers of commercial property. A basic law of economics states that if there is an increase in demand and stable inventory available then prices must increase. This is exactly what we’ve seen over the last few years as CAP rates have continued to compress.
However, what one must remember is that not only is the inventory of STNL properties a factor in the pricing, but so are alternative investments. STNL properties have been likened to coupon clippings in that there is typically a long-term lease with a credit tenant and the landlord has very little to do with the property other than collect rent.
In fact, nothing affects the price of an STNL property more than the lease terms, and the tenant’s credit; and many investors look at a purchase not as a purchase of real estate but rather as a purchase of a stabilized cash flow stream.
So what other factors other than demand, the tenant, and the lease can impact pricing? For this we must look at alternative investments, especially passive investments. The main alternative investment with similar returns that many investors look at are government bonds, especially tax free municipal bonds.
Investors see these types of bonds as relatively safe stabilized cash flow investments. As interest rates go up and bonds offer a higher return it will further attract investors to this market, thus creating less demand for STNL investments.
We have seen this play out over the last year. As interest rates have continually gone up; we’ve seen a decompression in CAP rates, almost identical to interest rates rising.
Overall, with interest rates likely to rise this year, we are anticipating that CAP rates will also rise (not just in STNL investments, but across all asset classes). Demand however, is likely to stay strong as STNL investments offer many benefits that you typically do not see in other investments. Also, with the change last year in depreciation schedules for commercial real estate the tax benefits of owning a Single Tenant Net Leased property, along with the passive returns they offer, may outweigh other alternative investments such as tax free municipal bonds.