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December 12, 2013

Survey: Thomas Co.

Specialty: Commercial real estate investment sales of single-tenant, net leased properties

Management: Jeffrey Thomas

Founded: 2013

Headquarters: Seattle

Projects: On pace to close about $200 million of net leased investment sales in the fourth quarter of 2013, comprised of more than 700,000 square feet of office space and several single-tenant retail properties

Thomas Co. just opened its headquarters in Seattle. Company founder Jeffrey Thomas added Adam Christoffersen to his team, which focuses on selling single-tenant office, industrial and retail buildings. Thomas spoke with the DJC about his new company and his thoughts on Seattle.

Q: You recently opened a new office in Seattle. Why did you decide to come here?

A: I originally moved to Seattle in 2004 while working to build CBRE’s national net lease practice. I had been in a few CBRE offices including Anaheim, Newport Beach and Phoenix, before moving to Seattle.

The Seattle move was really about lifestyle, because the business of net leased investments tends to demand more of a national than regional focus. I felt that once I was more established in the business, that I could live wherever I wanted. I always enjoyed my time in Seattle visiting family and had always thought that it would make a great home base.

I spent the last year in Southern California with HFF, also focused on net leased investments, but once I decided to start the new firm, Seattle was an obvious choice to locate the company.

Q: How does Seattle compare to other markets you work in?

A: Seattle compares much more favorably than many of the other markets we work. With a national focus, my team and I have not been historically focused on Seattle, though we have sold several net leased investments in the region and around the state. We have always seen strong demand for assets in and around Seattle. The primary attraction is due to the region’s strong business base, geographic barriers to entry and a relatively stable economic growth trajectory.

Generally speaking, single-tenant investments tend to be located in more suburban or secondary and tertiary markets, so we are rarely fortunate to have assets located in markets as strong as Seattle. Luckily, most net leased investors are more focused on the credit of the tenant and lease structure than the location of the asset.

Q: What are some trends in investment sales both here and nationwide?

A: Capitalization rate compression is the biggest trend that we are seeing at the moment. A historically low level of available product, relative to demand, continues to put downward pressure on cap rates. The scarcity is being driven by lack of new development (non-residential build to suits), historically cheap debt and a large wave of mergers and acquisitions within the net leased investment sector.

Spreads between the 10-year treasury and cap rates remain wide, which suggests the market could shrug off an uptick in interest rates as long as they don’t get too high. If interest rates move sideways in 2014, we might see additional compression in cap rates.

Q: You focus primarily on selling properties with a single tenant, how is that different than buildings with multiple tenants?

A: Single-tenant buildings, whether office, industrial or retail, are typically leased to one tenant on a long-term basis. The leases are generally more than 10 years and require the tenant to manage the building, not the landlord. They provide investors with long-term, predictable cash flow, and are valued more like a bond than traditional real estate. The investments are valued based on the credit of the tenant and the remaining lease term.

Traditional real estate market fundamentals — vacancy, price per square foot, market rent — affect the building’s value much less than for a multi-tenant building. Investors generally acquire single-tenant assets as a vehicle to preserve capital while earning a reasonable return. This contrasts with multi-tenant assets where higher returns are often possible, but the investment requires active management and daily exposure to market fluctuations.

Q: So besides your focus on single-tenant brokerage, what other services do you provide?

A: Ultimately, all of the services we provide are focused on the valuation and/or sale of assets leased to a single tenant.

We do a fair amount of consulting work, commonly for companies that want to unlock capital through a sale-leaseback transaction. We also advise build-to-suit developers on lease structure and exit strategy. We have become specialists at selling and valuing assets structured with “zero cash flow” debt, which is a particular niche within the single-tenant marketplace. A significant amount of our work involves advising on and executing investments with this structure.

In general, there is more complexity to the single-tenant investment market than people often think, and our advisory services are a large part of what we do.

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