The Net Lease Landscape is Shifting But Returns Remain Compelling

Ben Reinberg, CEO of Alliance Consolidated Group of Companies, which specializes in net-leased healthcare investments across the US, is in the process of closing on the sale of the medical office asset that 12 months ago he could have traded at a cap rate somewhere in the mid 5s. Today, he is under contract to sell the property for a 6 cap rate. 

Reinberg’s deal is not exactly the ideal illustration of the net lease transaction environment right now but it does serve to highlight the mindset some sellers are taking. “We wanted to sell and we didn’t want it to sit for however long it would take to get back to the mid 5s. Who knows, it could soon be at a 6.5 cap rate,” Reinberg says. He declined to provide more details about the transaction due to client confidentiality.

Indeed, experts will tell you that deal flow is slowing, albeit slightly, as buyers and sellers feel out discovery on rates and prices. There is a bid ask gap emerging with many sellers clinging to market dynamics of a few months ago.

“I feel that a lot of folks are holding onto assets especially if they have a good yield,” Reinberg says. “And buyers have to protect themselves on pricing as the cost of capital rises.”

But like all things with net lease, moderation and stability remain the defining characteristics of the asset class even as inflation, rising interest rates and changing cap rates circle at the edges.

Things are “off” slightly in net lease right now but its risk adjusted returns remain compelling, says Will Pike, a vice chairman and managing director of the Net Lease Property Group and Corporate Capital Markets practice at CBRE. “It is still active even if pricing is changing.”

For instance, at the beginning of the year, a property might have traded with a cap rate in the low to mid 3s. Now – particularly for larger-sized deals – that same property might go for a cap rate in the low to mid 4s.

Pike noted that properties in the $3 million to $8 million range haven’t moved that much. “The upper 3s are still in force with them. It is the larger sized deals where cap rates are moving.” That is simply a matter of different capital buckets for private deals and institutional ones, he explains. “The higher-yielding deals at smaller price points are seeing less of an impact while higher price point transactions that are lower yielding are more affected,” Pike says.

All things considered, he concludes, net lease is in a great spot. “It outperforms the greater CRE market during times of crisis. It had a higher share of the overall CRE market during COVID-19 and the Great Financial Crisis. It does well because of the dependable nature of its cash flow.”