Net Lease Will Likely Rebound Faster From Economic Slump
Net lease investments are solid and high performing investments -- they always have been, says STNL Development’s Michaelann Murphy.
The Fed’s recent string of rate hikes have led to tough times for commercial real estate investors, even for the relatively stable net lease sector.
“Interest rates have skyrocketed, cap rates have increased, construction costs have continued to rise, but land sellers haven’t caught up yet on lowering their prices,” says Michaelann Murphy, Vice President of Development at STNL Development, ahead of her panel appearance at this year’s upcoming GlobeSt spring net lease conference. “It becomes a four-sided squeeze on developer’s margins, or in some cases completely killing deals that were tight to begin with.”
But Murphy also says the net lease world has “probably seen the least effects of all the economic turmoil, and we will likely rebound faster,” adding that STNL has “gotten more granular” with contractors and tenants to seek value engineered options to lower costs or buy in bulk.
“We’ve also gotten into the trenches with our tenants to see if we can find creative ways to solve the cost issue without raising rent,” she says.
Murphy urges those within the net lease space “to remember that we love this business and that most of us have weathered harder times than this,” and notes that today’s market “is just taking it back old school” to the decade spanning 2000 to 2010, when interest rates were in the high 6% range. She also teased some of her planned remarks for the upcoming conference, noting that she plans to discuss what options developers and tenants may have within net lease deals to ensure a strong return for investors.
“With the Fed lowering their rate increases, the chaos and panic in the market will start to even out and we’ll see some cooler heads prevail in late 2023/early 2024,” she says. “In general, I expect developers will continue to accept lower margins, tenants will have to pay more rent, and everyone’s pipeline will be a little softer than we all would love for it to be. Oh, and the banks will win.”
She says net lease investors should remember their assets are still among the best possible investments, especially from a stabilization and diversification standpoint.
“Try not to compare today’s world to the insane returns we’ve had over the last few years — those years were outliers,” she says. “Net lease investments are solid and high performing investments. They always have been, and they will continue to be so. Go back to fundamentals when reviewing investment options, make sure you believe in the tenant and believe in the location.”