Net-Lease Pendulum Swings

Stan Johnson Co. Managing Director Brad Feller describes the single-tenant sector's balancing act as conditions start favoring buyers.
Brad Feller

For sellers and brokers, there is a certain nostalgia when remembering the heady days of the net-lease marketplace of 2014 and 2015. Still licking its wounds from the dark days of 2009, the market had rebounded to levels which would have seemed unfathomable just five years earlier. Capital was pouring into the market from domestic REITs and private investors, as well as from investors abroad. Sellers could hardly miss if they had an attractive net lease asset to sell.

Fast-forward to 2018, and the landscape looks markedly different. Fears of the imminent wholesale demise of retail—which are arguably overblown—coupled with rising interest rates and recessionary concerns have essentially altered the way in which investors are acquiring net-lease properties.

In 2015, the single-tenant net-lease marketplace reported more than $65.4 billion in transactions, which was not only this cycle’s peak, but also a record high. Compare that with 2018 year-to-date sales of only $42.3 billion, and a recent quarterly average of around $14.1 billion, and it’s clear that things have changed. The market isn’t even on pace to surpass 2017 totals, much less rival volumes reported at its peak.

With a noticeable increase in net-lease supply—currently above the $26.0 billion mark and rising each day as new product becomes available—buyers now have the liberty of being far more intentional and “picky” when it comes to finding their next acquisition. Sellers would be wise to account for this as they determine the right strategic moves for managing their net-lease portfolios. Specifically, sellers should consider the following steps to help protect their assets’ values:

Price Assets Correctly

Never in the last 10 years has it been more critical to price an asset appropriately when heading to the market than it is now. Over the last five years, sellers could price assets within roughly 30-40 basis points of an expected trading range and still receive interest from buyers. Today, however, is different. Assets priced more than 25 basis points from an expected trading range are simply not moving with any regularity. Overpriced assets sit idle while the market moves away from it. Even if repriced appropriately later, the seller ends up “chasing the market” which can result in a substantial loss of value.

Pick the Right Brokerage Partner

In tandem with proper pricing, sellers should consult with multiple potential brokerage partners before going to market. It’s critical that sellers be cautious of brokers who are over-promising results, particularly if those brokers don’t have an extensive current track record as they may be out of touch with market conditions. Ultimately, sellers need to rethink the way they work with brokers and should view them as partners who are helping them to navigate a shifting marketplace.

Understand Your Asset

Sellers need to be advocates for their assets and be able to provide brokers and buyers the most comprehensive understanding of their asset possible. Whether they are a private investor or an institutional asset manager, owners should have a thorough and current understanding of the properties and be able to paint the most accurate and compelling possible narrative.

Ultimately, even in a market that is shifting away from sellers, with proper planning, preparation and execution, sellers can still divest of their assets from a position of strength and achieve outstanding outcomes. But, it will be a balancing act for the foreseeable future as the pendulum swings further in favor of the buyer.

Brad Feller is a managing director in Stan Johnson Co.’s Chicago office.