Why Debt-Seeking Investors Will Focus On Higher Cap Rate Deals As Inflation Heats Up
Lenders today are looking at net lease characteristics that were more overlooked in a heated market.
Net lease will continue to command investor interest heading into 2023 – but inflation will prompt debt-seeking investors to shift their focus to higher cap rate deals to avoid negative leverage, according to one industry insider.
“Higher cap rates typically mean deals that may be more credit-challenged and/or with shorter lease terms, but fortunately lenders are very liquid and hungry to get the right deals done, so with some creativity, we continue getting to closing tables with deals that make sense,” says Miguel Jauregui of SAB Capital. “Lenders today are looking at net lease characteristics that were more overlooked in a heated market are now discussion points, such as population density and how strong the real estate is. It’s no longer as easy as well it’s a Walgreens so equal terms across the board no matter where it is.”
Jauregui says the experience and liquidity of the sponsor is more important than ever before as well, noting that “just because it’s an A-credit doesn’t mean any tenant is bullet proof.”
And as rates have ticked up, higher debt service is compressing the debt service coverage ratio and constraining loan proceeds. In those situations, he says, SAB Capital advises its clients to look at leverage in consideration of the loan-to-value, DSCR, or often the debt yield too.
Jauregui will share those insights at a panel discussion focusing on capital markets success for net lease executives at this year’s upcoming GlobeSt net lease conference in Los Angeles. He expects the conversation at the conference to focus on “rates, rates, and rates.”
“We will be focused on talking about what banks think these days, how are they underwriting/lending and where we see interest rates going. We know that it’s up, however how much and for how long are the big questions on an any investor’s mind,” he says.
Ultimately Jauregui believes net lease will continue to rank high on investors’ wish lists, particularly as essential retail continues to boom.
“When most other real estate investments weren’t collecting any rent, the CVS, Taco Bells, and Advance Autos of the world continued paying right on time with no headache,” he says. And “as baby boomers age out of their ‘hustle’ years, they are selling their management intensive real estate to move into a more passive position, and where else to go but net lease. This has been a large driver of the 1031 buyers that continue to complain about not seeing anything on the market for them to jump at.”
Check back soon for more insights from Jauregui and other panelists at this year’s GlobeSt net lease conference in Los Angeles.