Scarce Investing Alternatives Drive Niche Markets

LOS ANGELES — A scarcity of safe and consistent lending alternatives may be behind the high demand for net lease product, according to Chris Sands, the founder of Sands Investment Group. Sands’ company focuses on the net lease market, and has been aggressively expanding in response to the heightened demand nationwide. To find out about the firm’s expansion and get some insight into the very tight net lease market, we sat down with Sands for an exclusive interview. Here, he talks about the property types in the highest demand, how he navigates his clients through challenges and his forecast for the next year. Your company has been aggressively opening up new offices throughout the country. What is driving this expansion?

Chris Sands: We’ve witnessed growing demand for net lease investments from a diverse cross section of investors including private capital markets, REITs and institutional sectors. This has really driven our growth nationally in order to best serve these clients. We plan to continue to expand to additional markets, as we believe this will allow us to increase our market expertise and better identify the most active local and regional investors. Additionally, we’ve been fortunate to have identified talented, successful and experienced brokers who have helped us to expand our presence in major MSAs such as Austin, TX and Atlanta, GA in addition to our Santa Monica, CA office. Through proactive, well-timed growth, we can best serve our clients by providing them with real-time market knowledge and access to the best investments and the highest paying buyers for their properties. We are in a tight market. What is driving activity in the net lease sector?

Sands: Activity is being driven from a lack of safe and consistent investment alternatives. The net lease sector has provided investors from the private capital markets to the REIT and institutional investment firms the ability to obtain a steady and predictable yield on their capital. With the volatility and uncertainty in other markets, coupled with the ease of management in owning a net lease property, the demand for net lease has made it one of the most desired asset classes to invest in. You work closely with a broad range of investors. What types of properties are your clients looking for and in what markets? How are the investment strategies between the larger more institutional clients and the private investors different?

Sands: A portion of our clients is focused on longer-term leases with corporate-backed credit in primary and secondary markets. Our REIT and institutional clients are focused on term, credit and (typically) larger transactions, whether that’s sale-leaseback investments or portfolio acquisitions. We also work with an active client base that is seeking value-add opportunities within the net lease sector by finding short-term leases with below-market rent. In this scenario, our clients are able to create value by renewing the lease or finding another tenant at market rent. Whether the property is tenanted by a fast food chain, grocery, drug or convenience store, the common denominator of our investors is the desire for a predictable yield on their invested capital with little management required. What are some of the biggest challenges in the net lease space now, and how do you advise you clients to overcome these challenges?

Sands: Selling high and buying low seems to be the biggest hurdle new and existing clients are experiencing. Owners today are benefiting from a strong seller’s market and are taking advantage of this demand from the investor markets. The challenge is that with the number of investors and capital in the market, the demand is making it more difficult for a seller to exchange into an equal or better investment (whether it be a better location, longer term lease, upgrade in the credit of the tenant, increase in cash-flow or all of the above). Since we primarily focus on exclusively representing sellers we have gained access to a large pipeline of owners who are interested in selling, which in turn creates opportunities for our exchange buyers to move quickly and for the sellers to satisfy their need as well, creating a win-win for all. What is your market forecast over the next year? Do you see the market reaching a plateau, or are we poised for even more growth?

Sands: I believe the market is going to maintain its velocity over the next year. We’ve reached a plateau as it relates to cap rate compression and the demand from investors in the net lease space will remain strong for the next 12 months. Interest rates may rise in this time, but there will be a delayed effect on an increase in cap rates. The market will need to see a steady increase in interest rates before cap rates react. Inevitably we will see a correction and cap rates will adjust, but I do not anticipate that happening within the next 12 to 18 months.

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