The $1.5-billion sale-leaseback of 500 Red Lobster locations illustrates the appeal of triple net retail.

RESTON, VA—With large-scale sale-leasebacks making the headline news, net lease has been a favorite of institutional investors—both inside and outside commercial real estate—thus far in 2014, Calkain Cos. and Chandan Economics say in a new report. During the recession, the report notes, institutional CRE players saw triple net lease retail as a flight to quality, while non-CRE institutions viewed it as a higher-yielding alternative to corporate bonds. This level of interest is likely to continue for both groups, “now that triple net retail is emerging from its perception as an ‘other’ or ‘alternative’ asset class.

The poster child for both sale-leasebacks and the overall health of the triple net sector is American Realty Capital Properties. The report cites ARCP’s recent merger with Cole Real Estate Investments to form a $21-billion net lease REIT, the largest of its kind in the US, as well as its $1.5-billion SLB with Golden Gate Capital on approximately 500 Red Lobster locations, following GGC’s acquisition of the seafood chain from Darden Restaurants.

However, ARCP isn’t the only big player in the REIT sector, says the report, which points to the expansion of net lease trusts as a marker of the sector’s vitality. “Other net lease REITs like Realty Income have used the low volatility of cash flow from triple net properties to increase dividends for 19 years and counting.”

Additionally, the report notes that outside the realm of SLBs, “other institutional investors have increased their exposure to net lease assets as well, seeking higher yields than fixed income securities with a similar risk profile. Recent CMBS transactions have also seen an uptick in single-tenant triple net collateral. More and more, the net lease sector is experiencing a secular shift toward becoming a significant component of general commercial real estate portfolios.”

The reemergence of 1031 exchanges has also spurred demand for triple net assets. “Dwindling cap rates have forced some investors to chase yield by investing in properties with short lease terms,” the report states. “Others focus on secondary and tertiary markets, having been priced out of the primary markets by increased competition.”

The report includes a page of charts on net lease retail cap rates; while all sectors’ caps tended to peak between 2009 and 2010, their downward trajectories since then have been varied. For quick-service restaurants, for example, there’s been strong compression in recent years, with the current average of 6.4% only eight basis points above 2005 levels. Pharmacies have once again begun trading at a premium to the broader retail market, while the discount relative to general retail for dollar stores has begun to ebb and is expected to recede further this year and beyond.

The report was prepared by Calkain president Jonathan Hipp and research director Winston Orzechowski; and Sam Chandan, founder and chief economist of Chandan Economics. Both Hipp and Chandan are bloggers for