Early Indicators Of Improvement In Net Lease Landscape Inspire Cautious Optimism

Gradually increasing deal volume and stable values in the net lease market are creating cautious optimism in some brokers. Marcus & Millichap’s Preet Sabharwal says as average cap rates have steadily declined over the past five years, the dominant deal driver in the net lease space is private 1031 exchange capital.

The market seems to show a decline in retail net lease sales volume across the board, with year-over-year figures around -10%. The general trend of footprint contraction is being felt nationwide, as Macy's closes a hundred stores and freestanding drugstores see an 8% to 10% drop in their property values.  

The New York market shows early signs of correction, with these figures trending less negative in Q2. Still, a widening gap in the bid-ask spread is resulting in less offer volume and an inability to close among frustrated sellers.

The lack of CMBS financing availability and stringent lending guidelines by some of Wall Street’s premier lending platforms have also constricted capital, forcing buyers to rely on local and regional lending institutions to fund deals. Although values are stable, deal velocity has seen a precipitous drop due, in part, to CMBS decline.

But interest rates remain low, and Preet says he sees demand for new product continuing to rise, stimulating the supply side.

“Construction permitting for retail and single tenant net lease assets is hovering around 33% of pre-recession highs,” Preet tells us. “Less product means more competition and lower cap rates. We feel optimistic about the future of net lease and retail as land values are rising."

Preet adds construction labor and building material costs have risen to make it challenging for tenants to expand as frequently as they had in the past cycle.

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