As 2015 seems to have found its stride with everyone into full deal-making mode, one thing has become very clear in the net lease marketplace.
What was not long ago considered a “niche” in the commercial real estate arena, net leases have transformed into a full investment sector. While net lease products can supplement a larger portfolio with stable income, they can also form an entire investment strategy as many public and private REITs have proven. Investors large and small - institutional to the “mom and pops” - are developing a place in their portfolios for net lease products. This overarching appeal continues to drive their popularity.
The market has seen unprecedented compression in cap rates for top tier tenants – investment-grade quick service restaurants, banks, and drug stores – and the second tier crop of tenants seem to be following suit. By nature, a net lease investment is very binary. The tenant pays you rent or they pack up shop and stop sending the checks. Hence, the ultra-aggressive cap rates for the tenants that instill the most confidence with their prospective new landlords. As the second tier of tenants – franchisee guaranteed restaurants, mattress stores, dollar stores – begin to compress into “low yielding” range, one can only begin to think how low can these cap rates go? Predictions are varied and a low water mark remains to be seen. However, even amidst constant rumblings of interest rate increases, the market place continues to shine. This is certainly driven by the very wide appeal of passive real estate ownership and the ability to accomplish numerous financial goals – deferring taxes and estate planning to name a few.
Undoubtedly, however, the biggest driver of the explosion of the net lease sector has to be the internet. While a traditionally slow industry to adapt, commercial real estate has finally caught up to what many industries have known for a long time – the internet is a powerful tool! The net lease industry has specifically been a major beneficiary of the internet. It has helped brokers apply more efficient marketing and deal making, as well as provided a tremendous amount of nationwide exposure.
The beauty of a net lease is that, by definition, the property is lacking expenses for the landlord and quite simple to own. Most important in this context, the single tenant net lease is relatively easy for a couch potato investor to contemplate and initially underwrite. This has created an extraordinary increase in demand for net lease real estate, which 15, 10, or even five years ago would not have been the case.
Today a buyer sitting in Chicago can shop for properties all over the country with only an iPad or cell phone. Naturally, it does behoove buyers to use a broker in connection with their real estate purchases as it prevents over paying and increases the likelihood of getting transactions closed. However, these armchair investors are certainly setting the market with aggressive pricing. As investors’ confidence in the internet as a tool for purchasing real estate is at its all time high, it has created a new breed of buyer. Given this type of investor is so widespread and located on every end of the world, I think one prediction is safe to assume: the internet net lease buyer is here to stay. This blog isn’t being delivered by fax after all!
Kevin Conway | Net Lease Investment Sales Director
Mid-America Real Estate Corporation
One Parkview Plaza, 9th Floor | Oakbrook Terrace, IL 60181
Direct: 630.954.7375 | Fax: 630.954.7304
firstname.lastname@example.org | www.midamericagrp.com