Net lease investors have been on a wild ride over the last few years. The large run-up in benchmark rates beginning in 2022 created challenges around pricing expectations. However, Jason Patterson, executive director, investments at W. P. Carey, notes that despite some trade volatility and other factors, more stability in long-term rates over the past two years has helped those on both sides of a transaction find more common ground on where pricing should land.
Bid-Ask Spreads Narrow as Pricing Stabilizes
For much of the reset period, sellers were anchored in 2022-era valuations, while buyers priced deals on materially wider rates, and that gap has begun to narrow. "A slightly more range-bound 10-year Treasury provides some confidence on where pricing should shake out," says Patterson.
He adds that increased capital inflows to the net lease space have also further compressed bids, driving more transactions to pencil out on both sides. Where sellers once struggled to meet the market, a more stable pricing environment has made that alignment more achievable.
Tighter Credit Spreads and Sale-Leasebacks Support Deal Flow
Patterson explains that credit spreads broadly had been near record lows until recently, a condition that he describes as helping keep cap rates from widening significantly. Tighter spreads benefit net lease investors both in how deals are capitalized and in the cap rates at which tenants and developers expect to transact.
Patterson notes that he expects to see an increase in sale-leaseback interest driven by a pickup in private equity and M&A activity. He also adds that lower short-term rates may stimulate deal flow in private equity, and a change in ownership often serves as the catalyst for a sale-leaseback arrangement.
Moving forward, Patterson points to interest rate volatility and credit as two of the most important factors for net lease investors. Rate volatility, he notes, can quickly undermine returns.
He also flags credit as a persistent area of focus, noting that while recent headlines have raised broader concerns, the long-term nature of net lease real estate may make those risks more muted than in other sectors.
And as the market moves into a more active phase, those who keep a close eye on both will be best positioned to capitalize on what Patterson sees as a period of growing opportunity ahead.
For more stories in the W. P. Carey thought leadership series, click here.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.