In a recent Real Investor Radio podcast episode, Dominion Financial Services’s Craig Fuhr and Jack BeVier sat down with Sentinel Net Lease founders Dennis Cisterna III and Fred Lewis to discuss commercial real estate investing in the current market.
With mortgage rates hovering around 7% to 8% and inflation holding steady, many commercial real estate investors are choosing to stay on the sidelines, waiting for interest rates to fall before jumping into new opportunities. But Sentinel is taking the opposite approach — they’re open to new deals as cap rates have risen alongside interest rates, and they’ve found several worthwhile ones in the first few months of this year.
Here’s a look at their current commercial real estate investing strategies that can help you find a good deal, even when the market’s a little shaky.
1. Look for Single Tenant Net Lease Deals
What does a viable commercial real estate investment deal look like to Sentinel? Ideally, it involves a net lease, where the tenant is responsible for paying rent, taxes, maintenance, and insurance costs. A net lease reduces the investor’s monetary risk, letting them focus on growing their portfolio without needing to deal with massive infrastructure.
In most of Sentinel’s recent co`mmercial real estate investments, the property has few tenants — maybe one or two. However, the tenants hold a long-term lease stretching 10 or 20 years, and they have a solid operating history and a sound business model. That allows Sentinel to secure accretive debt and potentially provide outsized returns as a significant return of capital is derived from the contractual lease income alone, with the projected returns typically outperforming high-yield savings accounts.
2. Pinpoint Higher Cap Rate Deals
Sentinel is focused on investing in properties if the cap rate is at least 8% or 9%, and is often able to find attractive properties at even higher cap rates. There are many situations where Sentinel is not the highest bidder, and where other investors are willing to meet the seller’s price, but they are unable to secure financing to acquire the property. That means the seller must turn to lower bidders if they want to offload the property.
Conservative bidding has allowed Sentinel to secure the deal in several cases because lenders are more willing to provide funding when they see the projected cap rates based on a lower sales price.
3. Be Open to Office Space
Sentinel sees employers shifting away from the remote work model and bringing their teams back to the office four or five days a week. That means the need for office space will grow over the next few years.
And fortunately for Sentinel, the current supply of office properties is shrinking. Hundreds of underutilized office properties across the country are being repurposed for residential and industrial use while thousands more are being demolished to make way for new industrial and multifamily developments. When you factor in that very few new office buildings are being built right now, you can start to see where the demand for office can surge at some point in the next several years as supply starts to become constrained.
4. Focus on Midwest and Southeast Areas with Stability and Value
Unlike many private equity investors, Sentinel avoids investing in historically lucrative downtown properties in major cities like New York or San Francisco. Both Cisterna and Lewis cite investment risk in major metropolitan downtown areas, with problems like homelessness and crime potentially hampering returns.
Instead, Sentinel looks for commercial real estate properties throughout the Midwest and Southeast, especially in suburban areas with solid job and population growth and an overall high quality of life. They look for opportunities in cities and suburbs with top-tier schools, commercial services, and high-income thresholds.
In general, Sentinel believes these areas possess a substantial opportunity for future growth. If competition arrives, it will only benefit them, as it will drive up the price of its commercial real estate properties.
5. Only Take on Non-Recourse Debt
When investing in property, Sentinel only takes on non-recourse debt. Of course, with high interest rates, many lenders are unwilling to add more commercial real estate to their lending portfolios, making it more challenging to secure a loan. However, Sentinel has a strategy that works for them.
Their team starts by assembling a one-page teaser on the opportunity, including key metrics like the property’s location and the loan size required. Then, they send the teaser to approximately 150 lending institutions for every single deal. Sentinel finds that it’s easier to qualify for commercial mortgage-backed security (CMBS) debt if they can show they have a quality long-term tenant or tenant diversity to reduce risk.
The company also focuses on securing loans from regional banks and credit unions, a strategy Sentinel has had success with. However, Cisterna and Lewis admit that getting a loan can be tough, and it often takes a lot of door-knocking to seal the deal. The key is not to give up and make the relationship personal — get on the phone and be willing to set up a depository account if that’s what it takes.
More About Sentinel Net Lease
Sentinel Net Lease is a privately-owned real estate investment firm that acquires and manages commercial real estate properties across the nation. Their philosophy marries institutional-quality, data-driven investment analysis with exceptional boots-on-the-ground operational experience and meticulous asset management to deliver strong, risk-adjusted returns. Sentinelcurrently own 17 assets totaling over 1.5 million square feet with assets under management in excess of $280MM
Sentinel Net Lease just launched Sentinel Opportunity Fund I. During this time of market uncertainty, Sentinel will leverage its capabilities and track record to take advantage of favorable industry tailwinds and the compelling risk-return profile of stabilized office, retail, and industrial properties.. Visit https://www.sentineloppfund.com/ to learn more.
