Abundance of New Capital Enters Net Lease Sector

There is an abundance of capital flooding into the net lease market, and some established players are concerned that new entrants are getting out over their skis, so to speak. “Never before has so much capital been deployed into industries undergoing extreme structural change,” said Coler Yoakam, senior managing director of corporate finance and net lease platform leader at JLL, on the State of the Industry panel at the recent GlobeSt.com Net Lease conference.

The panelists discussed the arrival of new capital into the niche CRE sector that came with the pandemic last year. Daniel Taub, SVP and national director of the retail and net lease divisions at Marcus & Millichap, said that this isn’t unusual, explaining that new capital finds its way into the sector every cycle. There is a short-term impact on pricing and cap rates as a result because these players are often less experienced in understanding the net lease sector, but yet attracted to the risk adjusted investment opportunity.

Yoakam said that the new players include separate accounts and sovereign wealth funds that were developing net lease business plans before the pandemic. During the pandemic, they became ramped up activity to the net lease sector, but Yoakam says they are relying on advisors to make targeted investment. That is a sign, he said, that capital is being methodical and measured.

Still, other investors on the panel have seen a difference in pricing and cap rates as a result of new entry, and Gino Sabatini, managing director and head of investments at W. P. Carey, said that t a lot of the decisions don’t make sense. “People see cash flow and month-to-month returns,” he said, “but net lease is unique in that you could put together a pool of terrible properties, and you wouldn’t know for 10 years.” He added that when things get rough, you see who is still around.

Taub agreed that there is cap rate compression on deals that don’t warrant it based upon a risk adjusted comparative basis. That is because lesser quality credit deals are getting done because there is so much capital looking for opportunities seeking yield when compared to other investment options.

Sabatini says that the firm is focused on doing high-quality deals in the low 4% cap rate range to hedge against inflation. “We are looking at deals from a real estate perspective.” For now, he believes that cap rates have bottomed out. Taub echoed the sentiment, saying there wasn’t much more room for compression, plus with interest rates rising, cap rates should come up.