Castle-NNN:
Can the TIC Boom Sustain the Number of Sponsors?
From Elm Street to Main Street, the tenant-in-common (TIC) industry has quickly become a widely accepted and desired investment strategy. As the industry has matured and the various structures evolved, TICs, once a last choice option for investors, have become the preferred investment option when searching for a passive/packaged investment. As more and more baby boomers exchange their management-intensive, privately held real estate assets for passive investments that provide a stable cash flow, the number of investors will continue to multiply in 2006.
As a result of this burst of popularity, the TIC industry is currently satisfying the needs of about 5 percent of the total 1031 exchange demand. Industry sources predict that the total amount of TIC investments for 2005 could top $12 billion, with about $4 billion in equity attributed to securitized TICs. That is a sliver of where the industry should be given that this solution delivers institutions quality investment performance to individual investors. Some industry insiders predict that the industry could viably grow more than double its size to $25 billion in 2006.
Just as more and more investors are entering the TIC investment arena, so are the private providers, known as TIC sponsors. In fact, the number of securitized TICs is now exceeding 60. This is about six times the amount of sponsors in 2001. That doesn\'t account for the potentially hundreds more that are non-securitized TIC sponsors.
Can the TIC boom sustain the ever growing number of sponsors entering the market? After all, the greatest challenge for TIC sponsors is competing with other capital sources such as pension funds, REITs, advisors and other TICs for quality real estate product. Because real estate continues to be an outstanding hedge against inflation, institutional investors (such as retirement funds) are increasing their real estate holdings. Offering not only variety by region but by product type as well, real estate tends to be a very diverse investment, which increases its reputation as a safer investment option. Institutional investors are very interested in safety due to the uncertain interest rate environment and world political instability.
Simply put, the market appetite for institutional type property (investor demand) has driven prices so high that the available supply of real estate at reasonable prices has become very limited. In fact, many sponsors have a waiting list of investors. There is just not enough quality product with attractive returns around for many of the TIC sponsors to meet the needs of all their investors. Therefore, the consolidation of TIC sponsors may begin as early as 2006 since the ability to compete on the acquisition side of the equation has become more difficult with the number of competitors and larger, institutional players expressing their desire to enter the market as well.
The biggest challenge for TIC sponsors as a whole is obtaining property that meets their strict criteria. With each institutional quality property that is identified, there is more competition to buy than the deal before it. Sellers hold all the power and as a result they have become very selective when choosing a buyer. They want a buyer with cash in hand and in many cases will only work with TIC sponsors who are \'institutional\' in their approach to acquisition.