Net Lease Dealmakers Keep Their Word As Some Transactions Go Under

With interest rates rising and prices for new deals going up, decisions made between initial offers and closing now have added urgency.

Rising interest rates and the expectation that cap rates will expand have roiled the net lease market in recent weeks, with buyers rushing to close deals before higher prices are locked in and dealmakers agonizing over whether to close deals that may already be under water.

Nobody expects the flood of capital chasing net lease deals in all asset classes to ebb anytime soon, but dealmakers are feverishly adjusting their strategies to make sure long-term deals still will be profitable.

Speaker after speaker at this week’s GlobeSt Net Lease Spring conference offered their best advice for protecting assets from the sudden volatility that is permeating the market. For some, this means deciding whether to close on deals offered in December that already have gone south, profit-wise, in April.

“If we’re going to lose money on two of the four deals we’ve signed up right now, we’re going to hold firm,” Gino Sabatini, head of investments at W.P. Carey told conference attendees.

“Many of the other asset managers are doing the same thing. They feel just like we do that our long-term reputation is actually worth something and we’re not interested in damaging that, so we have more of a long-term focus,” he said.

Moving forward, W.P. Carey is adjusting its pricing for new LOIs. Other big asset managers are moving in the same direction.

“We’ve seen spreads go up by 60 to 70 basis points in the last two weeks. Some people want to get out before prices go up. I wouldn’t be surprised to see a slowdown in transaction volume in the next couple of months,” Maxwell Elliot, director of acquisition at LCN Capital Partners, said.

“Cap rates probably should have gone up a while ago,” said Gordon Whiting, managing director at Angelo Gordon. “Now that they’re finally starting to change, you don’t need to price gouge. A lot of people will take losses.”

Estimates of how quickly interest rate increases will lead to significant cap rate expansion varied from 6 months to as long as 18 months. Some suggested that the extraordinary amount of capital seeking net lease deals will continue to compress cap rates and delay significant widening of spreads.

“The demand is outweighing the supply by so much, it will temper what would normally be cap rate expansion,” said Daniel Taub, national director of Marcus & Millichap’s retail and net lease divisions.