Net Lease Properties are More Popular With Passive Investors
November 26, 2009
You see them every day, drive past them regularly and frequent them as a consumer, but you may rarely realize how single-tenant buildings have changed the real estate investment outlook for the Tampa Bay area.
There is no doubt that the region has seen some of its most dramatic development and population growth over the last several years. So why is this area seeing such an increase in net lease investments, the single-tenant real estate vehicle structured to generate a long-term income stream for the owner while transferring the responsibilities of taxes, insurance, and property maintenance to the tenant?
Triple-net leased investments, as they are termed, have become the investment of choice for area investors while developers and tenants see this type of lease structure as mutually beneficial to their respective business models.
Demographics changing
It’s easy to quantify what’s happening locally and why these buildings are becoming more prevalent. Bay area demographics are changing drastically and with that the entire infrastructure must change along with them. The influx of people has climbed dramatically, as have businesses to service their growing needs for retail, office, and industrial requirements.
The Census Bureau reported an estimated 2005 population of 3.3 million people throughout the Bay area, up 11 percent over the previous five years. However, Pasco and Hernando counties showed huge increases in that time, growing 24.5 percent and 21.1 percent, respectively.
Breaking down the total population growth, one could estimate that roughly 220 new people move to the area every day. Retailers and corporations took note of these palpable trends and began expanding their businesses in the region. That usually requires developing and expanding local infrastructure with buildings and roads.
The single-tenant asset class has become more popular for many retailers because those sites typically bring the business more prominence, allow them to control their own operations, and permits them to focus on their customer base in order to keep them in their stores longer.
Lastly, Florida’s unemployment rate, at around 3 percent, is well below the national average. Therefore, the mere demographic enhancement of the area solidifies the need for increased infrastructure and business development.
Simplified ownership
From a real estate perspective, building the structure and having the tenant sign a long-term triple-net lease are the basic requirements for the business to begin its operations in the new growth area. The investor is attracted to these types of investments because they are purchasing a simplified ownership position — i.e., there is only one or a few incomes to focus on and the tenant is responsible for all of the building’s operations, leaving the landlord with the sole duty of collecting monthly rent.
Tenants and investors both desire quality locations in high-growth areas that can support their concepts. Also, the underwriting of the tenant’s creditworthiness allows for a more calculated investment risk as opposed to buying raw land or a building with management-intensive multifamily housing.
Additionally, the Bay area’s growth has attracted the attention of out-of-state developers and investors. The intrinsic real estate value of commercial properties has increased demand based on the area’s demographic growth and desire for corporations to develop new sites within the region.
Price vs. return
With new attention to the area, the demand and desire for net lease assets has increased tremendously. Many investors have second homes in the area and are interested in purchasing assets that they can occasionally visit without having to make daily decisions about the property.
Compared to other parts of the country, Tampa investments typically offer a slightly higher return than assets along the West Coast. California, the nation’s most aggressive real estate market, has real estate investment returns that are 100 to 200 basis points lower than what many Tampa assets offer.
Even though traditional local investors may deem current investment prices high and returns somewhat low, West Coast investors are infiltrating their investment dollars to the area to increase their long-term yield.
Lastly, tax-deferred exchanges are also driving the net lease market as investors sell assets and defer capital gains tax payments by using Section 1031 of the Internal Revenue Code, which allows them to purchase a like-kind investment.
So the next time you pass your neighborhood pharmacy or coffee shop, realize there’s a lot more to that building than meets the eye.
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David Sobelman
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The West Coast of Florida is blessed by Mother Nature with beautiful coastline like none other in the world, sub-tropical, abundance of real sunshine, and year-round temperatures. Pasco County is located at the Tampa Bay Area here inWest Coast of Florida . Thus, it offers real estate possibilities to suit the choice and budget that one can dream of for a living. The first thing that you have to do is to look for Pasco real estate agents.
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