Rose: Steady economic growth will likely be supported through 2017, benefiting a wide range of single-tenant net-leased concepts that will dominate the development pipeline over the coming year. Rose: Steady economic growth will likely be supported through 2017, benefiting a wide range of single-tenant net-leased concepts that will dominate the development pipeline over the coming year.

CALABASAS, CA—No doubt about it: Investors are rethinking a lot of their strategies in the wake of rising interest rates.  But, according to Bill Rose, first VP and national director of Marcus & Millichap’s national retail group and net leased properties group, the impact of that “recalibration” is relatively minimal on the net lease sector, which is riding a wave of consumer confidence that actually began last year. (The company‘s latest Net-Leased Retail Research paper can be found here.)

The net-leased sector is buoyed by that tide of confidence, which is boosting retail in general. Rose reports that core retail sales rose 5.7 percent in March on a year-over-year basis.

“Boosted by the resurgent consumer, the economy maintained momentum to perform admirably in 2016, following a slow start to the year,” Rose says. “Steady economic growth will likely be supported through 2017, benefiting a wide range of single-tenant net-leased concepts that will dominate the development pipeline over the coming year.”

While some investors have applied the brakes, the low-leverage environment that marks the sector will temper those pullbacks. Further, “The popularity of these assets, particularly among investors exchanging out of more management-intensive assets, will minimize any upward pressure on cap rates,” states Rose. As always, well-located properties with strong credit and long lease terms are in demand.

Post-election, consumer confidence rose, but some of the policies emanating from Washington give pause, such as what 1031 exchanges will look like once tax reform is done. “The scrutiny of this provision by Capitol Hill amid a broader tax reform plan is raising concerns among investors and developers, but little guidance on the future of this tax provision has yet emerged,” Rose notes.

That said, the current sector snapshot is positive, positioning the net-leased market well for what the next few months might hold. Here are some highlights of the sector as provided by Rose:

  • “Net-leased properties recorded a 3.9 percent advance in the average asking rent last year, more than doubling the pace of multi-tenant shopping centers over the same period;
  • “Asking rents in net-leased properties are less than 2 percent below the pre-crisis peak, averaging $19.62 per square foot nationwide;
  • “Over the past three years, development has averaged 44 million square feet, while net absorption has averaged 66 million, providing a strong tailwind to the segment.”

To this last point, as the report states, single-tenant concepts have represented 80 percent of retail construction since 2009, an increase from 50 percent during pre-recession days. “Despite the upswing of net-leased deliveries, demand for space remains well ahead of supply growth, with net absorption exceeding development by an average of nearly 16 million square feet annually since 2010.”

For the full report, please click here.