Net Lease Investors Aim at a New Target

Net lease investors are expanding beyond the typical retail investment. Retail has been the main target asset class for net lease investors, but following the pandemic, retail-occupied industrial and logistics is fast becoming a new favorite.

Net lease advisory firm SRS Real Estate Partners National Net Lease Group rode the trend to a record-breaking year, an impressive feat considering the market change. The firm completed more than $1.9 billion in total net lease transaction volume comprised of 534 deals including debt/equity and valuations in 2020. “We were always retail only, but net lease is now encompassing more. It is a wider net and a wider product type. Investors are branching out with the market, and where our clients go, we go,” Matt Mousavi, managing principal at SRS, tells GlobeSt.com.

At the start of the pandemic, Mousavi expected trade buyers to exit the market following the July extension—but that never happened. “We were up 26%, and I didn’t think we would be there if you asked me last March,” he says. “There was a fear that trade buyers were going to go away, but there was never an issue. The market is still very active. There is so much demand and liquidity, and there is continued 1031 exchange activity. Low interest rates are really helping, and they are driving attractive cash-on-cash returns.”

In fact, new buyers entered the market, fueling a boost in activity. “The 1031 exchange is still a major driver of economic and investment activity, but a lot of buyers are trying to take advantage of low interest rates,” says Mousavi. “Partnerships, family offices and new funds are still being created for net lease assets, and they are raising money.”

Investors could quickly understand the assets that would perform well through the pandemic, like essential retail and logistics properties, which suddenly became integral to getting good safely to consumers. “With the ups and downs in the stock market, investors feel comfortable buying essential net lease properties. People have realized that life is going to go on with COVID,” says Mousavi. “This isn’t going to go away; we are going to have to live with COVID, and retailers are still going to be thrive. At this point, people have learned the way of the land. Essential uses, drive-through and anything tech or logistics related is going to be popular, and investors can invest in those assets and still be in a very safe position.”

While some properties fell to the wayside, like fitness centers, for example, other net lease property types continued to deliver returns, and investors focused there. “That learning curve really only took a couple of months. Investors were able to pivot and understand the new normal of net lease,” says Mousavi. “This is not your typical recession where everything is down. Certain industries are booming. That bodes well for us.”