Net Lease Tenant Credit Losses Expected to Rise This Year

Net lease landlords beware. Economic uncertainty, margin pressures, and higher debt costs mean tenant credit bears watching, according to Spenser Allaway, a senior analyst on Green Street’s research team and sector head of the Self-Storage and Net Lease sectors.

It is an about face from last year, when credit losses were near historic lows averaging around 75 basis points, compared with the long-term average of 125 basis points, Allaway writes in a recent market brief. “Yet, credit spreads in the bond market suggest above-average credit losses for the year ahead,” of around 150 basis points.  

To be sure, that is not a huge increase over the average, but it does point to a reversal for the net lease market used to smoother sailing. 

“The bond market is an accurate predictor of credit losses in the net lease space and based on where credit spreads are right now it looks like the bond market is forecasting higher than average credit losses,” Allaway says.   

“Any tenant with exposure to variable rate debt needs to be monitored,” she continues. “The tenant’s balance sheet is another important consideration outside of the larger trend of consumer spending,” she adds.