What Are the Bright Spots in the Net Lease Industry?

Lanie Beck, director of research & communications of Stan Johnson Co., recently chatted with GlobeSt.com about all things net lease. We talked about everything from favorite net lease property types that are showing the best fundamentals to geographic locations showing the most promise in the exclusive interview below.

GlobeSt.com: What should commercial real estate investors be thinking about in today’s climate?

Lanie Beck: Evaluate your investment strategy now. Do you need to divest of a high-quality asset while demand is still strong? Are you looking to acquire or trade into an asset to complete your portfolio or exchange? We are clearly past the peak of this real estate cycle, and market conditions are changing. Once we enter a recessionary climate – whether that’s in six months or 24 months – investors will not have the options they have today.

GlobeSt.com: What net lease property types are showing the best fundamentals for investment?

Beck: There are quite a few bright spots in the net lease industry, but my personal favorite just might be industrial. It’s a really exciting time for this sector, and the future, long-term role of industrial will be substantial. Every subset from manufacturing to bulk warehouse to last-mile fulfillment and distribution will each play their part in driving goods to increasingly demanding consumers. If investors don’t favor industrial though, we continue to see strong demand for healthcare assets – another industry with a growing population of “consumers” – as well as experiential and internet-resistant retail concepts like QSRs, fitness centers, car washes, and entertainment destinations. Lastly, don’t forget about multi-tenant retail. Well-positioned assets with diverse tenant mixes are increasingly popular with investors looking to transition out of high-demanding, hands-on management asset types, like multifamily. But we’re also seeing private investors who began with a single-tenant focus or strategy, branch out and supplement their existing portfolios with multi-tenant retail assets.

GlobeSt.com: What geographic locations who the most promise investing in net lease properties?

Beck: Generally speaking, the immediate outlook for non-major markets is favorable. Longer term, however, may be a bit more unclear. Many investors view non-major MSAs as more risky, and depending on one’s investment strategy, investors could be more or less likely to take a risk during a recession or downturn. For the foreseeable future though, there are opportunities everywhere – big markets, small markets, no markets. Rural communities, for example, exist and thrive on the presence of small box retail including dollar stores and QSRs, since they may not have the population to support casual dining restaurant chains, big box retailers, or full-service grocery stores. Higher-density areas including, secondary/tertiary markets or even the suburbs of major markets, continue to see strong activity for newly constructed assets as well as second-generation trades. But regardless of the market, investors will continue to be attracted to quality real estate with strong fundamentals – and those opportunities can be found everywhere.

GlobeSt.com: What are your thoughts on how the yield curve inversion & Fed cutting interest rates will impact net lease investors?

Beck: The yield curve inversion is a single market indicator that suggests a recession might be near, and while some warn that the market may already be feeling the impacts of a recession, that’s debatable. Over the next few months, while market conditions are relatively stable and demand from investors is still strong, the recent drop in interest rates should help continue to drive investment activity. Once we experience an official downturn, it’s difficult to say whether or not the one-time reduction in interest rates will noticeably buoy the market. As we’ve seen in past recessions, investors traditionally pull back and we see a drop-off in activity. Investment sales volumes decline, sometimes substantially, but they don’t drop to zero. Those investors still active in the market during the next recession may be able to capitalize on opportunities given the lower cost of debt, especially if the Fed chooses to cut rates again.

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