Net Lease, One of the Few High Yielding Investments

Net lease investment is in for another strong year, according to Spencer Levy of CBRE. Net lease inherently allows investors to achieve attractive risk-adjusted returns compared to other investment assets, even other real estate investments. That fact alone will keep the net lease investments in favor this year, but has investors look to mitigate risk in the wake of the pandemic, the asset class has become all the more popular.

“The single scarcest think in the world are large, high-yielding investments. If you look at stocks, bonds, real estate, there are not a lot. On a risk-adjusted basis, net lease provides one of those few avenues where you can get a very good risk-adjusted yield at scale,” Levy, global chief client advisor and senior economic advisor at CBRE, tells GlobeSt.com. Levy is giving his outlook on the net lease investment market this spring at the GlobeSt.com Net Lease conference, held in New York City April 4 and 5.

Last year was a record year for net lease investment, and Levy expects that momentum to carry into 2022. “I believe that this is going to be a very busy year for net lease investment because it is less risky in nature than some of the other asset types, and in part because you can still get a very good long-term, stable yield,” says Levy. “If you are able to go further out on the risk spectrum and take a shorter term, it could be even better. I see opportunities both for the core and core-plus elements of the market.”

Looking at specific asset classes, he sees the biggest return potential in office and retail. In office, net lease will be one method for investors to hedge against uncertainty in office demand. “Net lease provides a level of risk reduction that will make people comfortable investing in office, and much more so than in value-add office, which doesn’t have that net lease element,” says Levy.

The retail market has already bottomed out, according to Levy, and is beginning to recover. Levy sees massive opportunity in certain segments of the retail sector. His favorite: open-air retail centers, which he says is his “number one” investment bet right now. “That is because of the risk-adjusted return that you get,” he says. “It has a yield spread that makes open-air retail so attractive.”

While office and retail offer the best return potential, Levy still believes that industrial will be the net lease favorite in 2022, even if cap rates are compressed to the low 3% range in many markets. “If you are a core buyer, industrial looks exceptional,” says Levy, adding that core-plus buyers should explore other opportunities.

To hear more insight into the net lease market from Levy and other experts, sign up for the GlobeSt.com Net Lease conference in April in New York City.