Demand Increases for Short-Term Net Leases
Experts caution that short-term net leases are best suited to markets where rent hikes and rising inflation can be baked into deals.
Since the beginning of the year, more institutional and private equity players have been seeking net-lease deals with shorter terms, according to a State of the Industry panel at GlobeSt’s Net Lease Spring conference.
But panelists cautioned that short-term deals are best suited to high-demand assets in prime locations, including industrial and multifamily properties, where substantial rent increases and rising inflation can be baked into the deal to allow owners to recoup the cost of the building.
Traditional long-term leases that run for 20 years are easier to finance and don’t run the risk that the lease will run out before owners recoup their investments, they said.
Panel moderator Spencer Levy, CBRE’s global chief client officer, said that many short-term net leases now are trading at a premium compared to more traditional longer leases. Levy asked the panel to weigh in on risks associated with shorter-term leases.
“The properties that can handle short-term leases are in markets that have significant rent appreciation, which effectively makes a 3 cap a 4.5 cap,” Coler Yoakum, JLL Capital Markets net lease platform leader, said.
“It depends on the asset and whether you’ll be able to reset to market. I think people really need to focus on what the rent increases will be. If they’re 2-3 percent, they need to be higher and factor in CPI,” said Gordon Whiting, managing director at Angelo Gordon.
Several panelists suggested that short-term net-lease deals should be avoided in secondary or tertiary markets. “With tertiary markets, we want a long lease so we get our money out before the deal ends,” said Gino Sabatini, managing director W.P. Carey.
After the session, Gordon told GlobeSt that shorter lease terms increase the risk that owners may not get a full return on their investments.
“With a shorter lease you’re not going to get all your money back during the lease term,” he explained. “If you’ve got a 20-year lease at a 5 percent cap rate, you’ll get back 100 percent of the money you paid for the building, but if you’re doing a 10-year lease at a 5 percent cap rate, you’re only going to get 50 percent back.”
“A net lease product is effectively a fixed-income product,” he added. “It’s not like private equity real estate, where you’re going to buy it, put money into it (for improvements), lease it out and sell it.”