1031 Exchange Survey Results And Our View on the STNL Market

The current US administration has its sights on the longstanding and popular 1031 like-kind tax exchange. There are many reports outlining the administration’s proposed changes, which could have a particular impact on the single tenant net lease market.

Polling Our Audience 

We asked our followers on LinkedIn recently to chime in on where STNL cap rates might go if the proposed 1031 changes are made into law. Below are the poll results indicating ⅔ of voters predict a rise of 51 BPS or more.

Our View

We believe the answer is more nuanced than what was possible in our simple survey, and we outlined our high-level views in more detail:

• The STNL market has greatly matured and attracted a larger and growing institutional presence over the last 5-10 years. This means significant capital is already participating in the market and eager to buy in size on any potential widening of cap rates caused by changes in the tax laws or market conditions. If the 1031 exchange goes away, no doubt “the buyer is higher,” but we believe institutional capital will quickly fill the gap for high-quality assets, and price discovery won’t take very long to reset the market.

• Current STNL Spreads are too tight between Corporate and Franchise credit tenants. Many 1031 buyers do not pay enough attention to the credit quality of their tenants or differentiate between the large variety of corporate and franchise risk. We believe if the 1031 exchange goes away, the largest spread widening will occur here, between corporate and franchise credit.

• Similarly, we believe that the spread between Fee Simple STNL vs. Ground Lease investments has gotten too tight, also driven by less sophisticated buyers who don’t always differentiate between the two very different investment positions. In many instances, we now see Ground Lease and Fee Simple deals with the exact same tenant credit trading right on top of each other. If the 1031 exchange goes away, we believe Fee Simple cap rates will widen out vs. Ground Lease investments, albeit at much less velocity as corporate vs. franchise credit. 

• We are strong believers in the strength and maturity of the STNL market and will remain through the cycle build-to-suit lenders and will continue to grow and build our long-term hold STNL portfolio along the way.

What is your prediction? We want to hear from other CRE professionals. Click here to view the poll, and post a comment with your thoughts.