Net Lease Investors Rush to Allocate Capital

After a summer lull and an uneven 2020, the net lease investors are coming out in force. 

“Q4 has been total mania,” says Camille Renshaw, CEO and Founder of B+E. “I don’t think I’ve ever seen so much going on. Loads of large 1031 exchanges are in the market. We have smaller ones too, but these are probably the most $50 and $60 million exchanges we’ve had.”

Many institutional owners took a break in the spring and summer. “No one could get money out for one or two quarters this year,” Renshaw says. “Everyone has capital just sitting there doing nothing. All of that money has to get to work, and it’s just pushing hard for a home.”

Now, they’re ready to allocate this money.

“They raised too much money coming into the year,” Renshaw says. “So there’s definitely a lot of pressure to get that money earning and get it into properties. There’s a shortage of good net lease properties relative to that demand from both private and institutional buyers.”

Renshaw says there is a “ton” of off-market activity. “If you find a good property, you can pretty much place it,” she says.

With so much money out there, the market should remain active in 2021. Renshaw doesn’t think things will slow in Q1 because she doesn’t see anything really changing the market, other than possibly the Senate seats in Georgia.

“If you think both houses of Congress were going to go to the Democrats, maybe something will change,” she says. “But I’m not thinking that’s what’s happening at this point. But we’ll have to see what happens in Georgia.”

Newmark anticipates healthy activity from private investors who may be estate planning and looking to reduce their heirs’ tax burden. They may also want to move out of specific locations or property types and into more passive net leased properties in more tax advantageous locations. These investors could include office building owners who have a different outlook due to the pandemic or multifamily owners in areas with potential rent-control or tax increases on the horizon.

“We certainly expect private buyers to remain active into 2021,” says Matt Berres, executive managing director of Net Lease Capital Markets at Newmark. “With several REITs now off the sidelines, they can quickly capture back any lost market share given the amount of capital they have available to deploy.”

With mortgage rates remaining low, Renshaw expects cap rates to compress in the year ahead. But she still thinks there are good returns out there.

“It continues to create a 150- or 200-point delta between the cap rate and mortgage constant,” she says. “That is just great for owners. So it may look on the surface like ‘My God, what cap rate did you pay?’ But it’s still a pretty great return at the end of the day.”