Institutions Return to Net Lease as New Investors Dip Their Toes in the Market

Heading into the COVID-19 shutdown in March, net lease transactions were off to a strong start in 2020. Then, COVID hit, the volumes began to drop as the big players pulled back.

“A big piece of the overall net lease space is a lot of the institutional capital,” says Matt Berres, executive managing director of Net Lease Capital Markets at Newmark. “The net lease REITs pour billions of dollars into the space on an annual basis. So once the rent collections started to dip within the first 90 days or so they were really preserving liquidity.”

As these REITs’ stock prices struggled, their focus shifted to working with tenants. “You saw a fair amount of those acquisition officers wearing multiple hats and assisting in the asset management side,” Berres says. “They were talking to the tenants and trying to keep them in business.”

Berres says these acquisitions officers played a role in helping tenants secure Paycheck Protection Program [PPP] loans and working with them on rent relief. Meanwhile, as the REITs focused on these tenant issues, the private investors took a larger chunk of net lease acquisitions.

“With the IRS deadline extending out till July 15th, the private capital settled down and took some time to digest everything going on and really looking strategically,” Berres says. The institutions started to return to the market as some of the larger home improvement chains, like Home Depot and Lowe’s, grocery stores, pharmacies and quick service restaurants posted strong numbers. They had capital to deploy and focused on acquiring essential and resilient assets mostly in the retail and industrial buckets, according to Berres.

Since July 1st, the most active retail buyers have been Agree Realty Corp and Realty Income, according to Real Capital Analytics.

“I think towards the end of the year into the tail end at a later Q3, and now in a Q4, you’re seeing a good chunk of these institutions coming back and being active again,” Berres says. “So that’s encouraging.”

As Berres peers into his crystal ball for 2021, he expects to see more activity.

“As we look into 2021 with interest rates remaining historically low, we’re going to continue to see a very strong outlook with the amount of capital that continues to be in net lease,” Berres says.

He is also seeing some newcomers.

“There is even new capital from different sectors looking to get into the space as well, given the overall attractive risk adjusted returns for the space and the bond-like instruments that we sell,” Berres says.

Berres says these new buyers include private first-time buyers who realized how volatile the stock market is or took losses in other asset classes. Foreign investors and shopping center owners also moved into the space.

“We have talked with several investors whose portfolio consists of anchored shopping centers and they have recently raised or allocated funds for single tenant acquisitions,” Berres says.