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Single-tenant net-lease investment evokes images of retirement age investors looking for long-term, low-maintenance properties, but in the competitive New York real estate market, the client demographic for 1031 exchanges is shifting.
Younger developers and building owners have begun to embrace triple-net properties as a way to temporarily “park” their capital in low-risk assets around the country, until the perfect deal comes their way.
It might be the only type of parking in New York that is worth the money.
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Across the country, this strategy is common in markets where investors do not maintain a generations-long grip on properties. Marcus & Millichap broker Glen Kunofsky, who specializes in single-tenant investment, has seen these 1031 exchanges grow in popularity in the NYC market.
“I have seen this trend in New York increase over the last three or four years as the market has gotten so hot, as opposed to how it has been historically over my near 18 years in the business,” he said.
As interest rates and expense lines grow, building owners have been re-evaluating how much their buildings are worth.
“Owners have started to look to net lease, because it has no expenses," Kunofsky said. "The tenant bears it all.”
Investment has become less about future appreciation and more about immediate cash flow. Younger owners are less interested in holding out for a major return on investment.
“Generational control is shifting to 30- and 40-year-olds who are wondering why they are holding for some appreciation,” Kunofsky said. “My grandfather might have seen a 300% increase in returns, but what is my return on equity today? My building is worth $30M, but what am I making on it?”
When optimal investment opportunities run low in New York, many investors will look in other markets to temporarily place their capital, profiting from it in the process.
“Rather than sell a property for $20M and then pay 40% in taxes between depreciation recapture and local and state tax, investors will buy a net lease property that provides them with immediate income,” he said.
Investors can buy the property with cash and then refinance, using that money to buy another asset in the market while avoiding taxes. “They will either hold that property in perpetuity, potentially refinance it down the road or they will park it in the net lease property until the right New York opportunity comes along.”
Because 1031 exchanges offer flexibility, they can always return to the New York market should their long-term investment goals shift.
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Kunofsky has personal experience with 1031 exchanges. He began investing in multifamily properties right out of college.
“I bought small apartment buildings, fourplexes and tenplexes before becoming a broker, and I still own a few multifamily properties in the city,” he said. “I also did 1031 exchanges, and being able to relate to owners, relative to owning both types of properties, has helped me find what clients need because I’ve done it for myself.”
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