NREI Research Series
Part 2: Challenges and Opportunities

Part 2: Challenges and Opportunities

As part of the survey, we asked respondents to write about what they saw as the biggest changes in the space from 12 months ago and what they saw as the biggest opportunities and challenges for the net lease sector. Many insights emerged from these responses.

Many respondents wrote in about cap rate compression being a big theme in the past year. But some see that trend as having run its course.

“Cap rate compression has ended for all but newly constructed assets, leased to highest credit rated tenants, in 24/7 markets where there is competition from international investors,” one respondent wrote.

Another prevalent theme was that demand for assets continues to outstrip supply and that there is a lack of new quality product entering the market.

On the opportunities front, investors today may look to acquire, “short-term leases with strong credit rated tenants who have a demonstrated track record of strong unit-level performance,” one respondent wrote. “These assets can be purchased at much higher yields than new construction, but the risk of losing a tenant that has strong sales is minimal. Smart investors know they can bank on long-term tenant commitment.”

Another respondent sees opportunity on the development side of the equation. “We are a developer with an emphasis in STNL retail,” they wrote. “The biggest opportunity for us is getting linked up with all of the different types of retailers that are expanding.

When it comes to concerns, the overwhelming tone of the responses pointed to macroeconomic factors, whether it was interest rates, being unsure of how legislation might affect capital markets or the overall state of the economy.

“I’m afraid we are at or near the peak of the economy and lease rates have increased over the past five years,” one respondent wrote.

Another worried about what macro factors might portend in terms of institutional demand for net lease properties. The respondent pointed to a brief drop in demand from those buyers in 2015 and wondered if it would happen again in 2016.

“I think this is less likely to happen now that it seems less certain the Fed will increase rates again this year, but it’s still a concern as institutional buyers represent almost one-third of all net lease transactions in a given year,” they wrote.

TAGS: Net Lease News
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