Why Net Lease Is the Right Asset at the Right Time

Volatile times can be tough to navigate for investors looking to build and preserve wealth. Investors need strong strategies to ensure ongoing returns on investment while also embracing the wealth preservation practices long used by wealth advisors and family offices: hedging against inflation and enabling long-term asset appreciation.

Net lease can be an effective part of a comprehensive strategy.

To create the right strategy, it’s important to look at the conditions a portfolio faces. The first is geopolitics. The war in Iran has spread into a regional conflict affecting local stability and decisions, including potential impacts on governmental and economic decisions that could interact with business atmospheres.

The military conflict has resulted in trade disruption, with significant impacts on energy markets and chain effects on fertilizer availability and fuels for transportation and heavy equipment in construction and agriculture.

The more than 100-day near-total cessation of oil transit has caused multiple countries to drain their petroleum reserves. At the Bernstein 42nd Annual Strategic Decisions Conference on May 28, ExxonMobil Senior Vice President Neil Chapman explained that within a month reserves would be low enough to drive oil prices between $150 and $160 a barrel.

Inflation on the rise

Rising prices will eventually mean higher inflation. It has already begun to appear with the 4.2 percent year-over-year May CPI readout. Combine that with the strong results of the May 2028 jobs report, the Federal Reserve Bank’s Federal Open Market Committee is unlikely to decrease interest rates.

A number of Fed officials in recent public speeches have shown some increased caution. Known for being monetarily dovish, Fed Vice Chair for Supervision Michelle Bowman said, “In particular, the more persistent higher oil prices are—or if we start to see broader effects of higher energy prices on PCE inflation—the more likely I will consider shifting my approach to thinking about the balance of risks.”

Kansas City Fed President Jeffrey Schmid said, “My primary concern is inflation,” adding that it “is too hot and has been above target for too long.”

Individuals and family offices need to protect their wealth, requiring more than equity investments. Tuesday June 9 showed the volatility in the S&P 500 and the drop since June 2. Some think the recent agitation could have been profit-taking, concern about interest rates, the prospect of multiple trillion-dollar-plus hitting the market simultaneously, The Wall Street Journal suggested. Treasury yields remain elevated, meaning prices are down, offering potential when prices rise again, but there are also increased concerns about federal debt and inflation.

Wealth advisors and family offices know the importance of growing wealth and protecting it. Net lease offers some terrific benefits that speak to both.

The asset class is in a particularly strong position. Demand for retail space has been strong for years. Ironically, new retail construction has been constrained since the aftermath of the Global Financial Crisis, creating a nearly perfect circumstance for growing property value.

Net lease offers two other techniques for wealth growth and protection. One is cash flow. Smartly chosen properties with solid tenants mean ongoing income. The nature of net leases is that the tenant pays at least one of the following three expense categories, depending on the type of arrangement: taxes,  maintenance and insurance. That further increases profitability.

And, critically, for the current economic climate, net lease arrangements can have built-in hedges against inflation. Periodic escalators tied to inflation indexes ensure that rental revenues increase automatically.

Uncertainty and unpredictability at every level are part of the current environment. Sharp financial minds, like wealth advisors and family offices, know the importance of growing and protecting portfolios. Apply their insights to your portfolio, using net lease as a key tool.

Jonathan W. Hipp is principal of U.S. Capital Markets & head of the U.S. Net Lease Group at Avison Young.