The net lease sector is showing resilience and adaptability in the face of economic challenges. Industry insiders are optimistic about the future, noting continued growth and a tenant mix that remains eager to make deals. However, the landscape is shifting, with both retailers and developers implementing new strategies to navigate the evolving market conditions.
One of the most significant trends is the increased focus on cost efficiency and fiscal responsibility. "I think they're looking internally at their projects to ask where are there places that we can cut costs," says Becca Eiland, development partner with Hutton Build, who is speaking at GlobeSt.com’s Net Lease event being held in New York City in April. Retailers are examining their operations closely, seeking ways to streamline processes and reduce expenses without compromising on quality, she says. This internal scrutiny is driven by the looming specter of increased costs for supplies and construction.
Another notable shift is the growing popularity of preferred developer programs. Many tenants who previously engaged in one-off developments with various developers are now gravitating toward these programs, according to Eiland. "The reason being is that just efficiencies of scale and expertise." These programs offer several advantages over working with less experienced developers who may promise terms that are difficult to deliver on, whether in terms of rent or project timelines.
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The benefits of preferred developer programs extend beyond just efficiency. They significantly reduce the need for retailers to engage in extensive project management and hand-holding throughout the development lifecycle. "When you haven't done it a couple of times, there's a learning curve that has to take place,” Eiland says. “And with that learning curve comes a lot of added on expenses." By partnering with experienced developers, retailers can avoid these pitfalls and ensure projects are delivered on time and on budget, she said.
While primary markets continue to be a focus, particularly in high-demand areas like the Southeast, there's a growing openness to secondary and tertiary markets. This shift is partly driven by the persistently high land prices in primary markets. "Land owners aren't backing off of sale prices as much as we would like to”. Retailers are finding that these less saturated markets can offer surprising sales results. Starbucks, for instance, has successfully ventured into these areas, tapping into underserved markets and achieving unexpected success.
Flexibility is becoming a key characteristic of successful retailers in the net lease space, Eiland also reports. This extends to property footprints, with some businesses moving away from standalone single-tenant models to multi-tenant formats. Others are considering smaller spaces to reduce land requirements and overall costs. However, certain features remain non-negotiable for some tenants: "As long as you've got a drive-through for some that require it,” Eiland said.
Developers, too, are adapting their strategies. There's a growing willingness to be more flexible on deal spreads, particularly within preferred developer programs. This flexibility is made possible by the continuous deal flow these programs provide, allowing developers to spread risk and rewards across multiple projects.
However, these new strategies are not without challenges. Eiland cautions about the risks of unproven results, especially when venturing into new markets or altering traditional footprints. "It might be working for now, but is it a long-term, effective adjustment?" she questions. The lack of long-term data to support these new approaches adds an element of uncertainty to decision-making.
Right now the focus for Hutton Build is on identifying tenants seeking preferred developers. "That's really kind of our sweet spot," she says, "because we are really good about going into markets and scaling fast on behalf of these tenants." This ability to rapidly scale in new markets is seen as a key advantage of preferred development programs.
While embracing these new trends, industry players are not abandoning tried-and-true methods. Eiland emphasizes the importance of "going back to basics, looking for good land to develop, and then going out and finding tenants." This balanced approach, combining innovation with fundamental real estate principles, seems to be the recipe for success in the evolving net lease sector.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
