NEW YORK CITY—Against the backdrop of a solid domestic economy compared to that of other nations, a strong dollar and interest rate uncertainty, the net lease sector is attracting a plethora of new types of investors, according to expected members of the Investment and Transaction Outlook panel at RealShare Net Lease, taking place here April 15 and 16.

“The US market has gone from the outhouse to the penthouse in terms of perception,” declares David Piasecki, managing director, ElmTree Funds. “Foreign investors, such as sovereign funds, are expected; we've had a fair number of knocks on our door from that market.”

The interest comes at something of a peculiar time, he notes. “Typically activity in the US has come when the dollar is weak but now investors have the headwind of the dollar's strength. It's the first time I can recall where there's pent up interest for dollar denominated investments; it's a search for yield. Bond yields in Europe are crazy low so foreign investors are looking for some way to get yield versus their investment options there.”

Other players are seeing new domestic entrants into the market. “We're seeing large private investors in the net lease space competing with institutional investors,” asserts Glen Kunofsky, EVP of investments at Marcus & Millichap. “In the past, private investors were buying $1 million deals but now they're buying portfolios of $40 to $60 million and even $100 million and up.”

He continues, “A lot of the REITs have the lowest cost to capital so in larger markets, private families are selling buildings for $100 to $200 million. We just did a transaction that was a sale-leaseback on a bunch of restaurants in Los Angeles. We had bids [with capitalization rates] in the sixes from all five of the major net lease REITS but a majority of the properties went to net lease private buyers at a 4.5% cap rate.”

Explains Kunofsky, “These private investors are bidding up and paying more than traditional players because they have a 1031 tax motivation.”

Concern over the expiration of that tax break is dominating current market activity and could continue to do so throughout the year, adds Sean O'Shea, managing director of BRC Advisors.

“We find a lot of the work now is being driven by 1031 transactions,” he says. “If the 1031 exchange is adjusted this year, the second half of the year may be a crush of those transactions, with people unloading their real estate. There could be a mad scramble to find properties for people.”

Meanwhile, the market's strength today raises new questions for tomorrow, O'Shea notes. “We're also at a point where a lot of deals done 10 to 15 years ago are coming to the end of their term so the question is, 'If I buy something today, what are the chances of tenants renewing?'”

But of course, the big unknown that could change everything is interest rates. Most industry participants expect movement, but far from a seismic shift, says Will Pike, SVP, CBRE. “We expect rates to go up but the Fed is reluctant to make harsh moves so—from a net lease perspective and a macro economic perspective—we don't see any issues ahead for the next year or so.”

In fact, he adds, “As the economy strengthens, we will see more FedEx and Amazon distribution centers as well as Dollar concept stores on the retail side. There's a relatively healthy supply but demand for quality net lease product simply is greater.”