Investors are Buying NNN Lease Properties in Primary Markets

NNN Lease Market News

Opportunity Investors are Buying up Semi-Vacant Office Buildings, Retail Centers and Apartments in Primary Markets.

 Lenders are more likely to be interested in financing deals in a secondary market if they know that specific market is in recovery mode, says Ryan Krauch, principal at Mesa West Capital, a portfolio lender based in Los Angeles. “We can get very comfortable in markets we believe have come to a low point in their cycle.”

Mesa West has placed approximately $750 million in commercial real estate loans since the third quarter of 2010. In particular, the lender seeks to finance Class-A properties that stand to benefit from local tenants upgrading to higher-quality space.

That was the case earlier this year in Phoenix, where Mesa West provided a $40 million mortgage loan to finance two prominent office buildings known as Anchor Center. “You'll definitely see money flow first to the highest-quality, best-located properties in those secondary markets,” says Krauch.

 Investors who buy distressed properties or acquire assets in markets where property values are only beginning to stabilize may have to wait several years before those properties generate income, much less a profit.

Merage of MIG Real Estate says that's a risk he is willing to take because he believes that the economic recovery will eventually usher in steady rental income and healthy property values.

“We're a patient investor, so it comes down to the long-term viability of the marketplace that we're pursuing,” he says. “In a lot of these markets, it's going to be a long time before we see a significant recovery.”

Low interest rates mean leverage is affordable, but it is still challenging to find lenders who will finance deals in secondary and tertiary markets. “Capital is being very selective,” says Ronen of Lucent Capital. “We're reaching out to 50 or 60 different capital sources to find two or three that are willing to finance a deal.”

Lenders may offer higher loan-to-value financing on high-quality assets with partial vacancy, or in a market where property values have bottomed and are poised to appreciate as the economy recovers, says Ronen.

That's because the lender understands that the asset's value and cash flow will likely increase over time, which decreases the relative size of the debt on the appreciating property.

By contrast, prices on core assets in primary markets reflect a maximized income stream, leaving little room for value appreciation after an acquisition.

From a trough in December 2009 to March of this year, prices of non-distressed, trophy properties in primary markets had risen 26.7%, according to Moody's Investors Service. That's based on an index of properties valued at $10 million or more in the largest U.S. markets.

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