COVER STORY, NOVEMBER 2006

NET LEASE GROWTH IN THE NORTHEAST?
Geography may be limiting new opportunities.
Michael O’Mara and David Sobelman

There is no doubt that the net lease investment market has gained considerable prominence throughout the United States as an “investment of choice.” While most regions throughout the country provide similar opportunities for today’s investor, the Northeast commands special attention due to the many unique factors that drive the potential for growth and development. Typically, the single-tenant, suburban out parcel structure is the primary targeted asset class for both the merchant builder and investor. The availability of these opportunities in the Northeast states is much more limited as developers’ have a difficult time finding new prime areas to construct these buildings for their tenants’ potential needs.

The United States Census Bureau reports that the Northeast states have had a population growth of 1.92 percent since the year 2000. The Southeast grew 6.76 percent and the entire U.S.  population grew by 5.06 percent during the same period.

It is apparent that the stability of the population does not completely warrant new structures or expansion sites for tenants within the region. Therefore, the justifications for expanding a business’ operations to new locations are somewhat limited due to the fact that tenants would essentially be competing with themselves for market share. Urban sprawl, one of the most common factors fueling new single tenant, net lease development, is almost nonexistent causing many developers to forego building new sites without statistically warranted reasons.

On a more basic level, the mere limited geography and topography of the Northeast region does not allow for the growth that other areas of the country are afforded. As a comparison, the ten Northeast states total approximately 185,000+/- square miles, whereas the state of Texas alone is 268,000+/- square miles. There is not enough land to build more structures, especially in the more urban areas that largely comprise the Northeast. The limited retail commercial construction that is occurring in this area is mostly infill development that are satisfying tenant’s immediate needs.

Additionally, the Northeast population has more affluent inhabitants than most other parts of the country. The National Compensation Survey conducted by the United States Bureau of Labor Statistics cites the Northeast states, particularly the New England area, as one of the wealthiest in the country. Compensation is typically much greater in this area as white collar employees earn $3.27 more per hour than the national average. Additionally, an executive or management level employee will earn $2.41 more than the national average. Blue collar employees in the Northeast average $2.03 more per hour than the rest of the nation.  

Another key fact to consider is that there is no lack of population density within the Northeast as it is the most inhabited area within the U.S. Seven of the top 10 most populous states by density per square mile lie within the Northeast. Therefore, with the stable population and the limited amount of expandable land area, it is reasonable to conclude that the current populace is using its property resources to the fullest. 

As typically found throughout the U.S., there continues to be a surge in the number of investors utilizing the 1031 tax deferred exchange vehicle despite the historically low capital gains rate.  With more investors looking to invest locally, the result is a large number of private and institutional players chasing fewer deals. As a result, properties in the Northeast are commanding a premium. Buyers looking to acquire “exchange” assets within the region, end up paying slightly more for the benefit of staying within the locality because of the simple philosophy of supply and demand.

With the lack of new single tenant, net lease development within the Northeast region, the demand for purchasing existing assets becomes much greater. Even though most net leased transactions are free from any management responsibilities, many owners prefer to own assets within proximity to their residences in order to maintain a level of comfort with their investment.

Further influencing pricing is the surge in the number of buyers from the western states who seek the stability of the region due to the lack of inventory in their part of the country. Additionally, the increased return buyers are typically finding in the Northeast bodes well when matched against their targeted investment criteria.

For instance, when a West Coast landlord of a multifamily complex decides that they are going to capitalize on the sale of the 3 to 4 percent CAP rate asset they currently own, they are intrigued with East Coast returns that may hover in the 6 to 8 percent range.  Buyers are essentially doubling their return while diversifying risk into a new geographic region with a minimal chance of experiencing any major decrease in its population or wealth.

The Northeast United States has historically been one of the most demographically stable areas within the country. With low population growth, extremely high density, affluent residents, and a limited geographic area for expansion, the region demands specific attention for net lease investments. The stability and increasing value of real estate will most likely continue for years to come in this region. 

Michael O’Mara is the business development director for the Northeast and David Sobelman is vice president; both of Calkain Realty Advisors, the private market division of Calkain Companies. 

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.