3 Strategies for Net Lease Industrial Success

In the volatility of today’s market, net lease assets have been ports in a storm. Many see net lease properties as a steady stream of cashflow with minimal landlord obligations, which can be true. However, there are pitfalls for net lease owners to avoid. This is especially valid in the current environment, where even tried-and-true industrial markets like Southern California are seeing some softening. For the Los Angeles industrial market in the second quarter, for example, a recent report shows overall vacancy for industrial properties was up 5.3 percent, while rental rates for triple net lease properties were down $1.53 per square foot.

As owners and operators of a portfolio of commercial assets throughout the West, including several industrial properties net leased to tenants of all sizes, we’ve found success implementing the following strategies throughout the ups and downs of the market.

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1. Transparency builds trust

One of the biggest challenges for net lease owners right now is that higher vacancy rates mean tenants have more options when it comes time for renewal. This optionality is increasing in the industrial space, where vacancies have risen over the last eighteen months, in part due to a record level of new construction in the last three years. This can make negotiations at renewal tricky, when tenants choices may have expanded. Meanwhile, as owners’ expenses continue to rise, and as interest rates increase, the value of the lease decreases and there can be increased pressure to secure a renewal at a lower than market rate.

The best way to demonstrate the validity of a rate increase at renewal is to work with trusted broker partners to provide recent comparable transactions in the area. This proves to the tenant that the numbers you’re asking for are reasonable and market-tested.

Of course, in some areas, deal pipelines are currently slow, so recent comparable transactions may not be readily available. In those cases, the unique attributes of a net lease property and its value-add to the tenant’s business may be what seals the deal.

2. Evaluate competitiveness of assets for the long term

This goes back to the necessity of thorough due diligence and strategy when purchasing net lease assets. A prime net lease industrial asset features some valuable qualities that may be rare, such as high parking and low coverage ratios, good clear heights, or high existing amperage and capacity for more. These are the types of attributes that we look for based on our firm’s experience as owners and operators of facilities. We know they lend themselves well to future enhancements and make a property stand out.

Likewise, a valuable asset is a well-maintained one. Many may consider net lease properties as “set it and forget it” because maintenance responsibilities typically rest on the tenant. But staying proactive on property maintenance is key to retaining the long-term value of net lease properties.

Employing a property management team that provides clear, consistent communication with net lease tenants can be the best way to safeguard a net lease investment. A skilled property manager can build rapport with net lease tenants that goes beyond routine maintenance check-ins and becomes a reliable resource that tenants can trust and depend on. Clear communication serves both the property owner and the tenant well, and helps to build long-term partnerships that can smooth the renewal process when the time comes.

3. Plan ahead for predictable results

Yes, net lease assets can be a stable source of income, but they may also require some additional capital throughout the term of the lease. It is prudent to plan for some reinvestment, especially in the case of a five- or 10-year term. A roof may need to be repaired or replaced, security technology may need to be updated, or additional improvements may need to be made.

While some or all of that responsibility may fall to the tenant in the terms of the lease agreement, it may be wise for an owner to step in and ensure that the repairs or upgrades are being completed to the caliber that the asset requires. In some cases, that may mean ponying up additional capital to make a better long-term business decision.

With forward-thinking planning in place, risks can be minimized and a net lease asset can deliver on stable, predictable cash flow as time goes on.

Lukas Huberman, director of acquisitions & partner at BLT Enterprises, a multi-faceted real estate company that specializes in the acquisition, entitlement, development, operation, and property management of industrial, creative office, mixed-use and special-use properties.