Net Lease’s Staying Power

By Andrew Ackerman, Managing Director, Sands Investment Group

When examining how net lease performed in 2017, the conclusion is that it was another great year for this real estate sector. The industry experienced more record-setting prices throughout the country and investors continued to look to the net lease sector to provide much-needed stability during uncertain economic times.

While cap rates moved up slightly in 2017 across the nation, transaction volume stayed strong. Throughout the year, the property types that performed best included restaurant categories like QSR and fast food. While we didn’t see any new group of investors entering the market, it was clear that the greatest activity was among the baby boomer exchange buyers who actively sold their more management-intensive assets to take on net lease assets, which offer simplicity of management for the owner. Fundamentally, it is the very fact that net lease is brick and mortar that appeals to this investor group, as opposed to stock, security or business interest.

2018 expectations

Looking ahead, there is no doubt net lease will remain strong, despite additional expected rate hikes from the Federal Reserve. More buyers will look to net lease due to cap rate compression in other commercial real estate sectors, such as multifamily and multi-tenant real estate, leading to record pricing across those sectors. Moreover, as the baby boomers move closer to retirement, they will continue to seek out more passive investments and keep real estate as a preferred diversification strategy.

Net lease typically falls into a sweet spot from an investment range standpoint. Shopping centers, industrial and office buildings are priced higher than the range of the average private investor. That’s why the greatest velocity of investment sales in net lease falls in the $1 million to $5 million range. As more investors seek out hands-off investment options, there will be more mom-and-pop owners in this price range.

A more business-friendly political and tax environment should also drive greater business growth and real estate expansion for tenants across the country. This will encourage a greater level of new construction, adding more assets to the market in 2018 and beyond.

Medical properties and industrial assets, in addition to QSR, fast food and C-store sectors, will stay strong in the new year as they continue to be the service type of real estate that remains internet-proof.

Uncertain economic times drive investors to the stability and consistent management-free returns of the net lease sector. For the long term, net lease will have staying power despite changes at the federal level or even with the tide of e-commerce’s influence, and it remains a category accessible to those looking for effective wealth creation and wealth preservation choices.