2021 was a year filled with record-breaking transaction
volume in many different sectors of real estate as our
economy clawed its way out from the pandemic lows of
2020. One sector that shared this record-breaking success
was single-tenant, net lease (STNL) properties which
grossed around $100 billion of sales volume in 2021.
However, as interest rates have risen and inflation runs
rampant impacting many asset classes, STNL real estate
continues to be an attractive investment opportunity. The
likes of private equity firms such as Carlyle, Ares, and KKR
recently got in on the action by either acquiring or
expanding their net lease platforms. Other notable real
estate fund managers such as Angelo Gordon, ElmTree,
and Oak Street are long-time players in this sector and
have funds explicitly raised for net lease investments. This
begs the question: Why is STNL real estate gaining so much
traction in the current economic environment?
For starters, STNL properties limit risk for real estate owners
as tenants are entered into long-term lease agreements
with built-in rent increases that are sometimes even tied to
the CPI which acts as a great hedge against inflation. Net
leases also lower an owner’s operating expenses as tenants
are responsible for some or all of the property expenses.
Many STNL properties are acquired through sale-
leaseback transactions in which the tenant sells the
property while simultaneously entering into a long-term
net lease agreement. This helps the tenant convert
their illiquid real estate into liquid cash which can be
used for various activities, from paying off debt to
investing in growth. This is beneficial as real estate is
typically a non-core business for companies
considering these transactions. Seeing how these
transactions benefit both the buyer and the seller in a
time when many asset classes are struggling, it makes
sense that more investors are turning their attention
toward net lease real estate.
Jacob
Great article, I look forward to having you help me in our class discussion when we discuss Net Lease Deals as a form of financing later this semester.
I think the question isn’t “Is net lease real estate an attractive investment opportunity in times of low inflation and economic growth” but rather how these deals will fare during periods of high inflation. Yes, these leases have CPI clauses impacting their future rent increases but these clauses may also have caps or ceilings that limit the amount of these increases. At the same time the tenant bears all of the risk of inflation for their operating, tax, insurance and other related expenses. The problem comes if, and perhaps when, these tenants choose to vacate or downsize their tenancies at the end of their lease term. Since their rents are capped the values of the properties themselves may have decreased, especially if interest rates remain high.