The increase in deals shows that investors may have more comfort with the economy.
Written by: Chris Pappas, associate director with Marcus & Millichap’s, Net Lease Division
Many factors drove September’s increase in net lease sales. Some of those may be an indicator that the market is returning to normal.
“I think pretty clearly from the transaction types and the numbers from this month, the institutional capital is getting off of the sidelines,” says Chris Pappas, associate director with Marcus & Millichap’s Net Lease Division. “They’re placing money into these net lease assets before the end of the year.”
These investors put their money into big box assets, which are typically much more expensive.
“Lowe’s, Home Depot, and Hobby Lobby assets were at least $8 million or higher,” Pappas says. “Once you get to high price points such as those, it is more of a space where institutional players are active. So we absolutely saw that.”
Pappas says interest for assets that have cell phone carriers as tenants have also increased. “We also saw more dialysis centers, which are typically double net leased assets and have a little bit more risk, trading as well,” he says.
Overall, Pappas says these deals show that investors may have more comfort with the economy. “People see the economy start to recover, and their risk appetite is increasing a little bit too,” Pappas says. “They’re saying that they have a better idea of how each particular sector has been impacted by the pandemic. And they understand better and are more optimistic about how that industry is going to recover.”
Investors also may be growing more comfortable with the COVID situation in general, even though case counts are hitting record highs.
“It has been eight months now since March and since the lockdowns had been in full effect,” Pappas says. “It makes sense from a logical perspective that people have had time to digest the impact on the sector. Now they’re deciding to get back into that sector, take the risk, get a little bit higher yield and not chase those essential retail assets that everybody’s targeting.”
Record-low interest rates also drove the sales increase, according to Pappas. “There is a healthier spread between interest rates and cap rates, which is motivating people to buy,” he says. “I think that there is still a high degree of economic uncertainty out there. So, investors are looking to buy these long-term leased assets that have very reliable cash flows to continue to weather the economic uncertainties that are out there.”
Even with a COVID resurgence, Pappas is confident that the net lease sector’s recovery is real. “The demand will remain there,” he says.
Pappas thinks continued low-interest rates will continue to feed this demand. “I think that the velocity is going to continue, and it seems like the consensus is that interest rates are going to continue to stay very low,” he says. “And that’s also driving velocity in the triple net space.”
Shaver, L. (November 17, 2020). Net Lease's Recovery Looks Real. GlobeSt.