If the interest rates goes up how much decline should we seen in triple net properties in California?

Like now most of the triple net properties in California give you 3.8 to 5% cap which is a joke.
I mean does it make scents to invest you money for 3.5 % cap?
In Buying Property - Asked by T R. - Aug 15, 2014
Report Abuse
Answer this Question

Answer(s)

Nesha R.
Broker/Agent
Ontario, CA

Regards to higher interest rates, investors may want to look at those REITs with low cost structures.
REITs are the real estate equivalent of equity mutual funds. In the latter, the investor can buy into a diversified mutual fund and leave the actual investment management to the fund manager. The fund manager decides which stocks to buy and sell and when to do so.
With commercial real estate and REITs taking a breather in the wake of the Fed’s tapering expectations, the time to perhaps add some exposure could be on. However, given that the next few months may be rocky with regards to higher interest rates, investors may want to look at those REITs with low cost structures.
And you can’t get any lower than the triple-net lease real estate firms.
Net-leased buildings require little to no management and only minimal oversight on the part of the property owner due to how their leases are structured. At their core, these lease agreements requires the tenant to pay not just rent but also some or all of the property expenses that normally would be paid by the property owner. That includes things like rent, plus taxes, insurance and maintenance. At the same time, cash flows for these types of properties are quite dependable because leases are often signed for multiyear terms.
For the REITs that use these lease structures it can mean extremely low costs of property ownership. Ultimately, that trickles back towards investors in the way of higher and steadily growing dividend payments. Often those payments outpace rises in interest rates and inflation.
So it’s no wonder why investors have flocked to triple-net REITs. Over the past three years, these lease structured REIT's have more than doubled their share of the broad FTSE NAREIT Equity REIT index to 6% - with the last two years experiencing 11% share price growth. More importantly, analysts predict this trend will continue as both retail and institutional investors flock to the REIT type. Adding in huge amounts of triple-net M&A and you have a recipe for long term success.

Aug 18, 2014
Report Abuse
Alan C.
Broker/Agent
Suwanee, GA

Seem crazy, doesn't it? California has had very low CAP rates historically due to the high rates of appreciation in the past decades. However, the CAP rate compression has become so intense, many investors are looking elsewhere. Couple that with (the expected) rising rates and the math often doesn't making sense unless the appreciation is expected to be completely off the charts. The economy doesn't look like it will allow that.

Sep 5, 2014
Report Abuse
Scott R.
Broker/Agent
Laguna Hills, CA

So long as there are buyers that believe they can get their return requirement during their preferred hold period, the Cap Rates will continue to be very low.
However, they will experience upward pressures with higher interest rates, disproportionate sale price increases with lease rate increases, and anticipated appreciation.
The multi-tenant residential market prior to 2008 is a great example of anticiapted appreciation in value due to rapidly increasing rent rates driving prices. Interest rates were a distant second. If you could not handle an all-cash, low leverage, or negative cash flow during the first few years of the hold period, you were simply priced out of the market.
Right now in CA we are experiencing higher than inflation rent rate increases. So long as investors believe that will continue Cap Rates will remain low and resist increasing with interest rates - at least for a time and dependent on how much the increases in interest rates stifle the economy.

Sep 16, 2014
Report Abuse

Welcome to Answers

LoopNet Answers is where the commercial real estate community shares what they know to help each other out. And it's all for free.

Ask a question to get advice from brokers, investors, professionals and local experts.

Answer questions to raise your visibility as a trusted advisor and build new relationships.

Ask a Question

Post Question