National Real Estate Investor’s Beth Mattson-Teig reported in 1031 Buyers Battle Competition for Assets, Proposed Reforms on April 27, 2016, that the 1031 market continues to be a very crowded and competitive market, causing investors to have to work harder to find replacement properties.
Citing first quarter research by The Boulder Group, a national net lease commercial real estate service firm, she said this was particularly true for investors looking to trade into triple-net leased properties considering that high demand had caused cap rates in the single tenant net lease retail sector to drop to 6.18 percent in Q1 2016 from 7.1 percent the year prior.
With single tenant net lease retail sector cap rates remaining at 6.18 percent in the second quarter, the Boulder Group’s second quarter 2016 research verifies that competition remains a reality for investors.
Beyond what research of cap rates tells us, we know that competition is a practical struggle for you because you have called us and told us your stories.
On June 29, 2016, in 1031 Buyers Compete for Replacement Properties, Mattson-Teig again reported on the competitive market, stating “The high demand for replacement properties is driving up prices and forcing investors to cast a wider net in order to complete transactions.”
Though the competition exists, there are ways around it. Here are five strategies to help you beat the competition:
1. Seek out alternative property types.
Though the Boulder Group’s second-quarter research found that cap rates in the retail sector remained stable, they also found that cap rates for office and industrial sectors managed a small increase. Rates for the office sector increased to 7.25 percent in the second quarter from 7.20 percent in the first quarter, and rates for the industrial sector increased to 7.26 percent in the second quarter from 7.10 percent in the first quarter.
Investors who are willing to consider alternative property types have an opportunity to trade out of a low cap rate market, like retail, and into a higher cap rate market, like industry.
2. Look to various geographic locations.
Like property type, geographic location affects cap rates. With population densities higher in coastal and metro areas, demand for properties is high, decreasing the average cap rates. Rather than selling a property of high value and acquiring a replacement high value property in the same geographic location, investors can often find better yields when they exchange into a property in another part of the county.
3. Consider a different class of tenant.
Investors traditionally desire the stability of nationally known, top-rated credit tenants. Competition for these properties is very high due to a low supply in relation to the demand. Investors who have the flexibility to accept a little more risk can find it easier to acquire properties with higher cap rates that have lower-rated credit tenants. We’re not saying to completely lower your tenant standards. Regionally-known, franchised businesses, though not as highly rated as a nationally-known, corporate business, will have a higher rating and offer less risk than an individual retail tenant. Not all lower-rated tenants are equally rated. By expanding your search to include a variety of tenant classes, you will likely find additional suitable options.
4. Use a different lease structure.
Investors willing to negotiate an NN lease versus an NNN lease can often find a larger supply of available properties with higher cap rates. (We’ll talk more about the differences between these types of leases within the next few weeks.) Likewise, searching for properties with shorter lease terms can increase the amount of available options you can find with desirable cap rates. These strategies can increase the risk of the investment or require some additional management, but can be useful depending on your investment goals.
5. Take advantage of institutional options.
Institutional investors have the advantage of a team of experts with a variety of experience and relationships that can make it easier for the institution to acquire valuable investment property before it goes on the market or by negotiating more agreeable transaction terms. Furthermore, the institution, with a group of investors, often has more money to work with and can afford to beat the competition financially.
Working with companies like 1031 Crowdfunding can help you circumvent the competition altogether. Next week, we’ll tell you more about who we are and how we can help you beat the competition.