Net lease investors are seizing the moment as interest rates stabilize and political uncertainty fades. Miguel Jauregui, managing director of Capital Markets for Sands Investment Group, observes a market in transformation, with deal flow increasing and innovative financing strategies taking center stage. Speaking ahead of GlobeSt.com's Net Lease Spring conference in New York City on April 1, Jauregui unveils how savvy investors are capitalizing on emerging opportunities in this evolving landscape.
Jauregui predicts a continued upward trend for net lease as an asset class within the broader commercial real estate sector. "Net lease as an asset class will continue to increase as a slice of the greater pie of commercial real estate. And I expect that trend to continue," he said. This growth is occurring despite recent increases in cap rates and only slight decreases in interest rates.
The market has largely come to terms with the current interest rate environment, Jauregui noted. "We have seen your typical investor come to terms with the fact that these are what the rates are, what they are today, and for the foreseeable future that will remain the same."
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This acceptance, coupled with increased certainty following the recent presidential election, has led to an increase in deal activity.
Jauregui pinpoints the shift in market sentiment to September and October of the previous year, as the presidential election unfolded. "The market started to have the certainty that it likes to have in the future," he explained.
"Today a lot of deals come across our desk compared to maybe a year ago, when we were having to make calls for deals. Today, we don't really have to call for deals. They come in."
In response to the still-challenging market conditions, Jauregui's clients are using innovative approaches to secure financing. For value-added properties, Jauregui and his team structure loans with the potential for future cash-outs based on improved NOI. "We will build into the loan the potential for an earn-out on that future NOI, once it's realized," he explains.
To alleviate concerns about locking in higher rates, Jauregui negotiates repricing clauses. "We built in a two-year period, whereas after two years, he's going to have the opportunity to go to the lender for a fee of about 25 bps and adjust his rate to the current rate," he said.
Rather than fixating solely on interest rates, Jauregui emphasizes the importance of overall loan terms and lender compatibility. "We focus much more on the prepayment penalty. We focus more on the lender's ability to forge a future relationship, and what else they're going to be able to do for the client in the future," he said.
Jauregui observes a notable shift in investor priorities. "Probably a year back, I would say there was so much more focus on the rate because the market thought that rates would continue to decrease," he said.
Now, investors are more concerned with the overall terms of the deal, looking beyond just the interest rate.
Looking ahead, Jauregui anticipates several key developments. He expects increased liquidity, predicting "More lenders and liquidity coming into the markets, and a lot more sponsors getting deals done."
He also foresees a narrowing of lender spreads due to increased competition and market certainty.
The evolution of spreads is particularly noteworthy. Jauregui explained, "Back in 2021, we saw spreads as low as 125, 135 over the US Treasury. Today, we see a lot of spreads around 190, sometimes 250 300 depending on the deal." While current spreads remain elevated compared to 2021 levels, Jauregui believes they will gradually decrease as market conditions improve.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
