The net lease space is a multi-billion dollar sector. In the last 18 months, CGA closed on $2 billion in transactions, with average deal sizes over $100 million. As examples, one deal was for a government facility involving national security, another was for one of the largest oil companies in the world, each over $500 million. Although these deals indicate what is truly happening in the industry, such transactions frequently fly under the radar because government security concerns can arise, and other financings often involve equity of high net worth individuals, family offices and institutional capital, not exactly clamoring for press attention.

As one New York example, Gore cites CGA's making a loan last month to provide $198.3 million in financing to Muss Development and HomeFed Corporation for the Brooklyn Renaissance Plaza. The net lease office building houses the United States Secret Service, the New York City Law Department and the Brooklyn District Attorney's Office.

Regardless of where economists say the cycle is currently at, Gore is observing a rise in corporate and government users' build to suit and sale transactions, lending themselves to long-term net lease financing. He says in addition to trying to get in on low interest rates, being at the tail end of an economic recovery certain corporations and governmental entities had some pent up demand—and were finally getting to do new construction.

With forecasting interest rates, Gore refers to cap rates as “sticky”—slow to go down when interest rates drop and slow to go up when interest rates rise. He also says not a “leading indicator,” cap rates are nonetheless a “lagging indicator” of interest rates.

Sale Leasebacks—On the Cusp of a Materially Changing Market

However, Gore has not yet seen the onset of a robust sale leaseback market. But he tells GlobeSt.com “that light switch may be getting flipped right now.”

Gore says that the real estate industry may be on the cusp of a materially changing market environment: Interest rates are rising. Cheap capital from the corporate bond market may disappear. Cap rates may be going up and the tax bill now has certain limitations on the amount of interest corporations can deduct.

“So, the intersection of events may trigger more sale leaseback activity,” says Gore. “All the things that were holding sale leaseback activity down for the last three or four years appear to be unwinding before us right now to the point there may be more sale leaseback activity going forward.”

An Aggressive “Race to the Bottom”?

As yet another trend, Gore is witnessing an aggressiveness in the market with players taking risks straying from focusing on credit. Every net lease financing is fundamentally about the credit of the tenant, the payer, the structure of the deal—what's the lease like and the underlying real estate. What's it worth if the whole thing blows up, accounting for residual value?

Gore sees people in the market now focusing on the real estate, putting less emphasis on the credit and the structure. And he thinks that's a big mistake.

“We're seeing some very aggressive back-end risk, residual risk in the real estate being taken. We think it's being misunderstood and mispriced in certain situations. To quote one of our institutional investors, 'In some deals, it feels like it's a race to the bottom,'” says Gore.