Multifamily And Industrial Owners Swap High-Maintenance Properties For More Laid-Back Investments
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As prices have begun to level off after a boom in multifamily and industrial investments, owners have started to look for ways to maintain their capital gains. A popular option is 1031 exchanges.
Karly Iacono, an investment sales broker at Marcus & Millichap and leader of the firm’s Iacono Retail Group, has seen an increasing number of owners make the shift from multifamily and industrial to net leased properties. Often, these property swaps have as much to do with a change of pace as they do with smart investing. “They are looking to match or increase their income but in an asset that is completely management free,” Iacono said. “We are taking an owner who is used to day-to-day involvement with the property and saying: 'You can go to Florida.'”
Restaurants have become an in-demand property for these low-maintenance investors. “Restaurants offer rent increases throughout the base term, they are an accessible price point and they are Amazon-proof,” Iacono said. Marcus & Millichap's most recent transactions included several Burger Kings, a Wendy’s and a Popeye’s ground lease, an indication that fast-casual dining is a popular choice. Drugstores also remain a stable investment option. “They usually offer very long term leases — up to 25 years with another 25 to 50 years of options — and corporately guaranteed leases from some of the country’s largest companies. It is a very secure place to put your money for a long-term perspective,” she said. While Iacono sees brick-and-mortar banks as being less viable investments long-term, stellar credit ratings continue to make them another in-demand property type.
In New Jersey, the scarcity of quality net leased inventory in the face of high demand has led to many transactions going well above asking price. This was the case with the Popeye’s ground lease, which sold for $2.6M in North Bergen, N.J. “We sold it at a very aggressive cap rate, before the building had even been built,” Iacono said. “We sold it in a matter of days and had six offers, two of which were above ask, all cash. That speaks to the demand for the New Jersey market and the lack of supply.”
The success of the deal often comes down to the knowledge of the broker, who must not only learn what the client needs, but also meet that requirement within the strict 1031 exchange timeline — 45 days for ID and another 135 days to close. It is sometimes down to the wire. “We had a client come to us last year with two days left in their ID period,” Iacono said. It is very difficult to deeply understand a client and what they need in 24 hours.” Marcus & Millichap’s team rose to the challenge. “We camped out in the office with our computers for pretty much an entire day and went through inventory, making offers hand-in-hand with the client. It was very resource-intensive, but we were able to find them three properties to list on their ID and they ultimately closed on a bank in Georgia.”
Iacono and her team’s job is to make the 1031 exchange process, and the final investment, stress-free. Although, they would hope sooner, rather than later. “Ideally we like to speak to clients when they are first contemplating selling their asset and making a change. When we are involved from the beginning, we are able to avoid all of that stress and scramble at the last minute.”
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