Good News for Net Lease Investors Worried About Inflationary Risk

Reader warning: This is a good-news/bad-news/good-news blog. First the good news. As Reuters reported recently, the stock market has been on a “steady” climb, and it now stands to make “fresh records, extending a rally that has seen the S&P 500 gain 13 percent this year and nearly 90 percent from its March 2020 low.” A major rally is also taking place in US government bonds since their selloff in Q1, “with the benchmark 10-year Treasury yield . . . recently at 1.46 percent, a whopping 30 basis points (bps) below Q1. 

What’s more, CoStar predicts that interest rates are likely to remain at bargain-basement levels through 2023. 

Let’s bask for a moment in the joys of the New Normal. OK, basking is done. Now for the bad news. The “i” word–as in “inflation,”–is beginning to crop up in conversations, certainly among the members of the Federal Reserve Policy-Setting Committee, and CoStar states that, “13 members noted the risks to inflation in the core personal consumption expenditure price index,” and they actually worry that inflation could settle over the land at a much higher level than has been previously reported.

It should be noted that this fear wasn’t across the board, and indeed much of the stock gains were based on Fed assurances that inflation would be short and shallow. Now, says Reuters, “Signals that the Fed is growing less confident in those assumptions could unsettle stocks, which have benefited from quantitative easing, and hurt bonds, as rising prices erode the value of longer-dated debt.”

Enough of the bad news. Now for the good, good at least if you, as an investor, are eyeing or doubling down on your net-lease portfolio. Why is this good news/?

According to CCIM, “Leases written by credit tenants with strong balance statements, such as Starbucks, Walgreens, Barnes & Noble, FedEx, Best Buy and Applebee’s are highly prized. These types of triple-net tenants often specify initial terms of 10 years to 20 years. Rent frequently remains stable for 10 years, then increases by six percent to 10 percent and remains level for an additional 10 years.” 

Buying the right net lease investments that have increases throughout the primary and option terms allows you to keep pace with, or even outpace inflation.

We disagree, especially in the face of such variables as an economy-strangling event (like a global pandemic) or the upcycle Fed machinations that can lead to inflation. We’ll opt for the risk-aversion of triple-net investments in any climate.

And so will wise investors be more interested in preserving their capital than gambling with it. It’s a wise choice, and in uncertain climates such as this, it’s also very good news.