Net Lease Momentum Returns

Momentum is returning to the net lease sector after a slow start to 2019, analysts say.

In its Market Snapshot report, Stan Johnson Co., Tulsa, Okla., said net lease properties across the office, industrial and retail sectors posted “more encouraging” sales figures in the second quarter after a slow first quarter.

Stan Johnson Co. reported first half net lease sales totaled nearly $30 billion across the three sectors, four percent higher than year-ago figures. Last year the sector posted a healthy $70 billion in sales. “Is a repeat of last year expected? Likely no, but market conditions continue to be excellent for investors, especially with the Fed’s decision to lower interest rates,” the report said.

Net lease market sales transactions could approach $62 billion for full-year 2019, the report said. “If these predictions hold true, it would make 2019 the third-strongest year in history. If lower interest area the fuel needed to exceed these expectations, it’s possible we could see a repeat of 2015 or 2018.”

Focusing on net lease retail assets, Calkain Research, Herndon, Va., said it is too early to see the full effect of the Federal Reserve’s rate cut on the market’s dynamics. “What we do know, however, is that further rate cuts will keep potential buyers and sellers looking for deals,” the Calkain Cap Rate Report said. “Until then, the market is holding steady with activity from the first quarter market with some interesting changes. We see a robust number of transactions taking place, as in the first quarter, and other than the typical summer doldrums there are no signs of slowing down.”

Calkain noted that as the already long real estate cycle lengthens, investors that want to lock in long-term income are taking a hard look at the real estate fundamentals behind every deal. “If a property is occupied by a reliable tenant with brand recognition in a prime location, with high visibility to passing customers and ease of access, it is likely to trade at a premium,” the report said.

Cap rates for retail net lease properties fell 11 basis points during the quarter, Calkain said.