What to Watch for in Net Lease This Year

This asset category attracts capital in both bull and bear markets. Here's an update on the buyers, the prospects for returns and the outlook for the coming year.
Brian Shanfeld

The new year is already in full swing for the single-tenant net lease sector, and we are keeping an eye on several trends that emerged in 2018 and could impact 2019. Who is buying? What are returns looking like? What is in-store for 2019? First, let’s take a look at who has been buying STNL assets.

Private buyers continue to pursue the net lease space, and the pace of new market entrants is not letting up. Purchase volume by private investors accounted for 42.5 percent of volumes in 2018, the highest level this cycle. Private investors’ ability to nimbly place capital and, in some cases, be more aggressive on pricing than institutional capital is boosting their buyer share.

Institutional investment remains relatively stable despite overall selectivity impacting the buyer group. Net lease REITs stand to be relatively active as well given their lower-leverage profile.

More Secure and Less Complex

In addition, we continue to see that the search for yield and portfolio diversification is drawing cross-border investors to the sector. Cross-border capital accounted for 9.8 percent of transaction volumes in 2018, a proportion that is above the cyclical average. This is indicative of cross-border investors’ penchant for the sector given its relative security and lower level of complexity.

Cap rates for net lease transactions hovered around their historic lows during 2017 and into 2018. Driven by several catalysts, such as the rise in interest rates and uncertainty over the future pace of rent growth across portions of the retail space, the retail sector has seen cap rates record an approximately 30.0 basis point rise since 2017.

So what will 2019 look like for the single-tenant net lease sector?

In 2019, we expect to see additional catalysts that will test investor sentiment in 2019, such as slowed economic growth, increased volatility in equity markets and trade disputes. On the other hand, the Federal Reserve’s recently less hawkish stance and continued strong job growth figures will balance some of these pressures.

Net lease retail assets, like most fixed-income assets, thus stand to see softening in value in 2019. There continues to be pressure on further growth in liquidity as investors remain selective in the marketplace.

Furthermore, we expect there to be additional new single-tenant net lease retail development deliveries in 2019, and pricing will be tight for their development proformas. Something has to give in 2019, and it will likely be sellers’ expectations of price becoming more in line with the current buyer sentiment.

Brian Shanfield is a managing director with JLL Capital Markets.