Net Lease Deal Flow Plummets Amid Mounting Pressures

As inflationary pressures continue to mount and high interest rates persist, deal flow in the net lease space has slowed considerably, leaving inventory in flux as would-be sellers stay on the sidelines. 

“The transaction volume in the past year and a half has fallen off the cliff,” said Catherine Tenney, principal at The Carlyle Group, in a panel on the state of net lease capital markets at this year’s GlobeSt Net Lease Fall 2023 conference in Los Angeles. “But that’s part of the brilliance of net lease, frankly. We have a stable of performing assets, so we have cash flow. It’s not like in the debt markets where you have to constantly replace your loans as they get paid off. We have the stability of a portfolio of performing assets so we can sit and watch and wait for the opportunities.”

In a state of the industry panel earlier in the day, Gordon Whiting, managing director at Angelo Gordon, said investors are looking for stable returns in the current environment.

“We use insurance company debt, CMBS, local and regional banks…and we also use our line of credit if we need to close quickly and with all cash,” he said. “But listen, even if you use portfolio-level debt you’re not buying in a vacuum. At some point you have to sell, and you want to do it on an accretive basis. If you have a low cost of debt, you’ve got to take that into account.”

Ultimately, “lenders are still lending,” Whiting said. “Rates are up, but lenders are still lending. And there’s more of a focus on relationships these days; if you have been a good long-term borrower, that goes a long way to making sure you get debt on the deal and get it closed.”

On the private capital side, “there’s definitely not the amount of certainty we once had,”  said Miguel Jauregui, director of capital markets at SAB Capital. “Whereas in the past I could run with a deal and get a term sheet with 80 to 90 percent certainty of closing, that’s not the case today. Yields are very tight.”

“It’s a challenge right now, no sugarcoating that,” said Adam Christofferson, Senior Vice President & Division Manager – Marcus & Millichap, adding that private buyers are increasingly being forced to create depository relationships with lenders with whom they don’t have existing ties.  “A lot of deals by private buyers now are all cash if they can, especially on the $2 million to $7-8 million side. A lot of these deals are now just all cash, instead of someone putting debt on it.”

Getting a deal across the finish line in the current environment is a “game of transparency,” Jauregui says. “It’s all about being in touch with various stakeholders constantly so everyone is aware of what’s happening along the way and what timelines are looking like…Because there are less lenders, the ones who are out there are very buss. They have a lot of deals in their pipelines. So when someone emails me and asks a question, I’m all over it. I’m responding within a few hours at most.”