NNN Market Update
As the purchase and sale of single tenant NNN space continues its torrid pace into the first quarter of 2014, the financing for such transactions is also at record production levels. The number of 1031 exchanges has been on the rise over the past few years, and the the NNN space has become a favored place for exchange buyers to park their money due to the lack of property management and perception of low risk. This phenomenon has been propped up by low interest rates and high liquidity in the loan market.
Banks are looking for good quality loans to invest in, prompting a tremendous increase in NNN production. Availability of longer fixed rate product on partial and non-recourse terms are appearing at a dizzying clip. Historically these institutions rarely played in the 10 and 15-year fixed rate world, but banks will be ramping up efforts to compete with the vastly expanded CMBS marketplace on single tenant product. We also expect banks to follow clients to unexplored markets in order to drive production.
CMBS lenders are very strong on the NNN market. With the emergence of over 30 CMBS lenders this year, Wall Street deal sizes will dip below $5MM—a number they have not historically been willing to breach. The CMBS market is a volume based business, so these lenders will be aggressive in putting out money and loosening underwriting standards.
Most life companies have increased their lending allocations for 2014, which includes long term fixed rate earmarks for NNN product. While these organizations can be more conservative in their underwriting, their terms are going to be very hard to beat if the deal’s credit is attractive.
The availability of long term fixed rate financing in the 4-5% range for investment grade tenants is no big surprise—the same sort of pricing for sub-investment grade or privately owned tenants is more of a shock. In the next few months this will change due to product scarcity and the willingness for banks, CMBS, and some life companies to consider providing competitive debt solutions for atypical credits.