REIT Outlook on Net Lease Remains Strong Despite Ongoing Uncertainty

Net lease deal flow for REITs has been steady over the last six months, according to panelists at this year’s GlobeSt Net Lease conference in Los Angeles – but the environment appears to be “resetting” a bit amid ongoing market uncertainty.

“I think if we look back to Q1, it was largely apparent that the industry was trying to find its footing in terms of price and accelerating off the heels of Q4 2022 and the market turmoil in the rate environment,” said Keith Griffin, VP Acquisitions at Spirit Realty Capital. “That made Q1, I would say, a little bit lighter than what we were anticipating….but now it feels like we’re in another environment where we’re resetting here.”

Griffin’s co-panelist Balji Dashdorj, Vice President of Acquisitions at Four Corners Property Trust, agreed, noting that deal flow became more challenging in the second quarter as rates continued to rise. He also noted that in Q2 and Q3 of last year, his firm realized sale-leasebacks were more in their favor: “Being able to pick up some of those longer term leases and benefit from constructing a lease that we’re more in control of with our tenants just works well for us,” he told the audience. “And they are also just better deals overall compared to what we were seeing in the existing net lease space.”

Dashdorj also said that while Four Corners hasn’t changed its acquisition criteria in the current market, they’re “still very picky and stringent.” 

“The real estate is still what matters and the pricing is what has changed,” he said. “But I think the quality of the stuff we’re trying to buy is still the same. Looking ahead, “I think – I hope – that over the next few months things stabilize. And once they’re stable, hopefully the deal flow can flood back.”

As for inflation, “it obviously impacts our customers and impacts our tenants,” Dashdorj said. “But all our tenants especially are very sophisticated operators. I think they know what they’re doing and I think we try to look on the bright side of the inflation bubble.”

The panelists also shared their thoughts on current cap rates in the space, with Griffin opining that “things are likely to cap out here another 50 to 75 basis points — so call it an eight cap plus on most of the deals that we’re looking at. 

“I think we’ll continue to see cap rate expansion,” he said. “I can tell you just from looking back at this time last year we were probably able to do a deal in the in sixes, and so from that day to today we’re probably looking at 125 basis points of a difference. That’s a big move – but if you put it in context, it still historically doesn’t reflect what you would expect to see cap rates at given where the rate environment is today.”