The Net Lease Break-Up Strategy

Net lease owners are seeking new ways to leverage their investments, and it's paying off—in turn attracting more investment sales brokers than in years past, relates Max Freedman, founding partner of Sands Investment Group.
Max Freedman

Net lease remains hot, and owners are looking for ways to leverage this investment opportunity. For example, many shopping center owners are breaking up their larger facilities in order to monetize the value of their net lease assets. That’s why we see more investment sales brokers going after net lease product versus in years past, as opposed to the monster power center deals and larger-price-point transactions.

This strategy is building steam for a number of reasons: The delta between a single-tenant net lease credit tenant app as a freestanding building versus selling a $20 million-plus power center by itself can be as significant as 150 to 200 basis points. While negative press continues regarding big-box retail, the freestanding pads that are outside of these centers can still drive yield to them.

It’s definitely a strategy for owners to use the pads as a way to pay down their debt or pay back equity interests in their shopping centers. Holding the strip space can become a high-yield investment once you buy down the invested capital.

The investment climate

Right now, there are more buyers in the market for assets that are priced at $5 million and under for hands-off-management, triple-net investments. The more you can create this product type, or something that fits in that box, the higher you can drive the price for the asset.

This has an impact on the builders’ strategy as they look to create product that fits the triple-net market mold. More people are looking for the hands-off investment opportunity. These are buyers who are not involved in real estate on a day-to-day basis but are seeking wealth creation options unlike stocks and bonds. 

Looking ahead, we see more change. Many tenants are self-developing or owning for themselves, making it a much more competitive marketplace for developers that want to build the product for the tenant. Pad sites and entitled land sales are stronger than ever, as the buyer pool continues to expand.