LOS ANGELES—While financing of net lease assets in 2014 differs somewhat from 2007, there are many similarities, said speakers at RealShare Net Lease West here earlier this week. The redux of CMBS has been one of the contributing factors to the similarities in these two frothy markets.

“Since CMBS came back a few years ago, there has been a lot of conservative underwriting,” said Ken Carpenter, managing director of CCRE. “Leverage-wise, it's not back to '07—we had more leverage back then—but underwriting standards are moving back to '07.” He adds that today, 65% to 70% leverage is most common, while that figure was higher in 2007.

Michael D. Drusano, managing director of CGA Mortgage Capital LLC, said, “We are seeing some additional players, like community banks” entering the net-lease space. “We are migrating toward 2007, but we're not there yet.” With regard to covenants, Drusano says his firm is mostly non-covenant, relying on the stability of the loan documents and stable underwriting.

Carpenter pointed out that there is a bias against cash-out refinancing in value-add transactions, and generally speaking, things are similar to 2007.

Moderator Adam Petriella, EVP of Coldwell Banker Commercial Alliance, shifted the discussion to foreign buyers, and panelists said there has been global interest in net-lease transactions. “It's coming from everywhere—Asia, South America, Europe and the US,” said Maurice Nieman, SVP of CBRE. Mike James, VP, national retail group, for Marcus & Millichap, added that many 1031-exchange buyers of net lease properties are coming out of the New York area, and Sam Alison, regional director for Stan Johnson Co., added that there has been a lot of cross-country movement of capital in the space, as well as overseas interest. “It's a pretty interesting prospect. They buyer pool runs pretty deep.”

James added that the price run-up for net lease has been amazing. “People are putting aside operator fundamentals and are just buying yield.” Meanwhile, “I think we'll see a lot more debt coming into the net-lease space,” said Alison.

Non-traditional net-lease lenders are also entering the space. Carpenter said CMBS “hates net lease. They don't know how to underwrite it, they don't know about tenant credit. So when CMBS starts to wave in net lease, you can expect a storm at some point in the future.”

Nieman agreed, adding, “This might be the inflection point at which things are changing.”

James pointed out that lenders are getting anxious because there's not enough product for them to finance. “They'll finance anything.”

Moving on to talk about brands that are under-the-radar and emerging, Nieman said his bet is on the regional food chains, while James said dialysis centers such as Fresenius and DaVita are emerging. “They had some political headwinds, but they learned their lesson. They're staying with mid to large markets close to hospitals now.”

Nieman added that privately owned ERs and plasma centers are beginning to surface in the medical arena as the privatization of medical services becomes more popular.

Petriella asked about oversold brands, and Nieman mentioned electronic stores, Office Depots and less fresh restaurant chains such as TGI Fridays and Olive Garden, which he predicts will be replaced by Chipotle, Panera Bread and other quick-serve restaurants with fresher options.

“Burger King and KFC haven't adjusted for inflation, and that creates disagreements between the franchisees and the corporation,” said James. “People want fast, healthy and fresh food—which the older brands can't offer.”

Carpenter said that credit rating changes the metrics and allows deals to get done, “but it has to be a market that's not overtaken by the Internet.”

Despite talk of declining cap rates, there are some retailers seeing a rise in cap rates, said Nieman, including Auto Zone and dollar stores, while drugstore cap rates are declining. James predicted that the dollar stores will slide gradually higher, while the drugstores have hit bottom. “We are seeing cap-rate compression in specialty and regional markets,” said Alison. And, as cap rates slow, institutional investors in net-lease properties are accepting more risk, moving to tenants like Red Lobster, said Neiman.

The discussion shifted to interest rates, and Drusano said the fundamentals of the economy are pretty shaky, so rising rates are not going to happen, “but some floors are being issued. People who buy bonds have to get some yields.”

Neiman predicted that rates will hold steady through 2016 and then will go up, adding that developers are very busy putting more product online. Carpenter agreed. “I don't think there will be a major correction any time soon—probably not for two to three years, giving us a chance to make hay. There's still much capital to be deployed in this asset class.”

Alison added that he is seeing significant retail-sales growth in Southern California, and there's a “pretty good correlation between that and the economy in general.”