There is no doubt that we have seen drastic adjustments in the net lease market. Not only from the financial and economic perspectives, but from a psychological perspective as well. Of course there have been quantifiable increases in cap rates, interest rates and internal rates of return, but the perception of today's market is probably the most interesting intangible investment factor.
As the President and CEO of a net lease brokerage firm, I have the privilege of working with professionals from a multitude of disciplines within commercial real estate. We hear market perspective from attorneys to engineers, developers to sellers, REITs to investors and everything in between. What we are hearing is everyone wants more for less. That doesn’t mean that they are getting it, but at least they are saying that they want it.
Investors want better credit, longer leases, the best real estate and an absolute triple net lease. What may be forgotten is that net lease investments offer something that other real estate doesn’t; the opportunity to underwrite the known investment potential from day one. There is no other type of commercial real estate that will allow an investor to know exactly what their income will be from the day they buy the asset until the day they sell the asset. The perception is that they should be getting a much better return than they are being offered. In some cases, that is highly warranted. But in others, it may not be.
We have to remember that net lease investments are still a long term income stream backed by real estate. When an investor and I discuss the current market statistics, I always remind them that yes, they will be getting a better return than what was offered in the last 3-4 years, but they may not be getting the deal of a lifetime. Net lease investments are still garnering single digit cap rates for long term, credit tenant investments. There was a day when today's investments were pricing out at 10%+ CAP rates, but not today.
Today, we see genuine interest in the net lease investment asset class because of its passive nature and higher returns than money markets, cd's, US treasuries, and the like. So while the perception of the market is "buy now, because it may not be this good again," I offer the following advice. The net lease market will ebb and flow with the rest of the market, but stability of the assets will typically remain somewhat constant. Net leases are almost an anomaly in that respect. Perception is reality, but net lease investments are real.