Single-Tenant Net-Lease Investments a Safe Bet

By Rob Bickel,
Managing Director, Jones Lang LaSalle Inc.

It’s no surprise the net-lease investment market has experienced such strong demand over the last 18 months. Given the volatility in the equity markets over the last cycle, single-tenant net-leased assets provide investors with what they’re looking for today — a sense of safety and security. Investors are still very risk-averse and the economy is, as we well know, still uncertain.

The economic situation in Europe is tenuous at best and what net lease provides investors is the ability to underwrite a single credit — a single asset, and a commensurate yield reflective of the underlying credit. The most difficult thing to find today for investors is current cash flow or current yield. Treasuries are below 2 percent, so the spread to what can be achieved on a typical net-leased asset is at a historical high compared to what you can achieve in the risk-free Treasury market. That’s a big driver today, and as a result, I believe we are going to see transaction volumes in this space close to the historical high of 2007.

In 2007, the total transaction volume for single-tenant transactions (office, industrial and retail greater than $5 million) was approximately $39 billion, according to Real Capital Analytics. To put that figure into perspective, the total transaction volume for 2010 and 2011 was approximately $11 billion and $30 billion respectively. I believe we will see transaction volume for 2012 come close to or exceed the high of 2007. The volume will be driven by the intense amount of capital demand and the projected low-interest-rate environment over the next 18 to 24 months.

There are many funds being raised for this type of net-lease investment due to lingering economic conditions, and the Fed’s indication that interest rates will stay low for another two years. Investors are coming around to the fact that this might be the way it is for a while and without economic growth creating value-add and opportunity situations, here’s a way to put money to work, get a good current yield, with long-term, stable predictable income. Typically, when investors underwrite a net-lease product, they see three-quarters of the overall return coming from the contractual rent from the tenant, which is a nice fat percentage compared to most other investments, based on a primary lease term of approximately 15 years or more.

The overall sector has grown considerably over the last few years with many new players entering the market. The public non-traded REITs and income-focused funds continue to dominate the space alongside the private equity capital retail investor. There are many new buyers that have historically not participated in the market are now wading in. These new participants include endowments, Funds of Funds, pension funds and life insurance companies. We are also seeing sovereign wealth funds from the Middle East taking a look at this highly efficient market as well. Any group that needs current yield and hasn’t been able to achieve it in other real estate classes has taken a strong interest in the net-lease sector. It’s a good time to be both a buyer and seller in the single-tenant net-leased space.