Experts: Stabilizing Interest Rates Will Smooth Net Lease Deal Flow

“This is the new normal and the sooner you accept that the sooner you’re back to business.”

The net lease market is in a “transitional period,” but experts at GlobeSt.com’s Fall 2023 Net Lease conference in Los Angeles this week agreed that stabilizing interest rates will ultimately lead to better deal flow. 

“I think this is the new normal for debt,” said Gordon Whiting, managing director at Angelo Gordon. “A lot of the folks in this industry aren’t that old. They haven’t ever seen double-digit interest rates and double digit home mortgage rates…I’ve been doing this for 30 years. This is the new normal in my opinion and the sooner you accept that fact the sooner you’re back to business.”

In a state of the industry panel kicking off this year’s conference, Whiting took particular note of the recent flight to net lease product by institutional investors seeking stability.

“Net lease, particularly less than investment grade, was never an institutional product,” he said. “Now you’ve had more net lease firms crop up and they’ve all got capital and they’re trying to invest it. But it’s not as easy as people think. Investors now understand what we like about the product – steady, stable, and increasing cash flow and pass through tax benefits. There’s a lot of reasons to love this product, and it will all sort itself out but this is a transitional period. Once rates stabilize you’ll get back to normal transaction levels. People can adjust return expectations and get their mindset around it.”

In the meantime, however, inflationary and rate pressures continue to weigh the sector. A lack of 1031 buyers is also creating a void in the market, especially for product in the $2 to $10 million range, and “spreads aren’t coming in anytime soon,” said Gino Sabatini, managing director and head of investments at W.P. Carey.

“Developers producing retail product have a backlog in many cases,” Sabatini said. “Many have a number of stores they’ve developed where they think they’re getting a 6¾ takeout and that’s not available, so they’re sitting on the balance sheet. I get the sense that this has not yet come to full fruition, and we’ll see that drive cap rates down.”

“On the smaller private client retail side, we’ve seen 50 to 100 bps changes in cap rates,” said Adam Christofferson, Senior Vice President & Division Manager – Marcus & Millichap. “For well-located, longer leases, greater credit tenant deals, cap rates can be in the 6s. There’s still some stuff in the 5s, but it’s prime, maybe Southern California type stuff – but things have moved. There’s a lot of spread between the different client types, but in general we are looking at 50-100 basis points higher than before.”

 The panelists agreed that they’re seeing a modest increase in seller financing to get deals across the finish line, with Whiting noting it represents “a good test of how tenants feel about themselves and how long they want to stay in the asset.”