The Net Lease Alternative in a Stalled Market

Much like the broader private equity industry, private equity real estate is grappling with the same dilemma relative to original underwriting: When can exits pick up steam? The 2022–2023 interest rate shock of 11 Fed rate hikes totaling 525 basis points over 16 months compressed commercial real estate transaction activity, and that activity remains in recovery mode.

The longer interest rates stay elevated, the harder it becomes for real estate private equity investors to exit. Valuations continue to be under pressure, the institutional exit window remains slightly cracked open and the traditional private equity J-curve is stretching in ways most fund managers didn’t underwrite.

Enter net lease real estate: a shallower, more predictable curve that immediately generates contractual yield, precisely when traditional private equity cash flows can go quiet.

The mechanics of the traditional exit gridlock

Institutional portfolios have long been built around a familiar rhythm: Commit capital to a real estate private equity fund, absorb early cash outflows and wait for the back-end payoff several years out. Under more normal conditions than we are experiencing today, it can work. However, the early years can be trying—capital gets called, management fees kick in and cash flow uncertainty persists.

For value-add strategies, the burden is heavier still. Lease-up risk is real, tenant improvements and leasing commissions draw down funds before stabilized cash flows arrive and the entire strategy rests on the sponsor’s ability to execute (i.e., lease up vacant space, reposition the asset and exit at a higher valuation). That execution risk is largely absent from a stabilized net lease structure.

Adding to the uncertainty, value-add funds can require multiple capital calls. Investors who aren’t prepared for the cadence may be forced to fund at inopportune times. The J-curve deepens with each draw.

Payoffs can come later, sometimes much later, driven by timing of occupancy improvement, NOI margin expansion, cap rate compression and a clean exit. Deal volume in the current cycle fell to multi-year lows, and sponsors are holding properties well past their anticipated hold periods, with LPs sitting on locked-up capital and few visible outcomes in sight.

Rethinking the J-Curve through a net lease lens

With real estate exits taking longer to materialize, institutional investors are taking a fresh look at net lease. Specifically, how the NNN J-curve compares to more cyclical real estate private equity strategies (e.g., multifamily, office, self-storage) that may rely more heavily on favorable macroeconomic tailwinds.

The early dip is typically much shallower. From the moment a net lease property closes, it generates contractual rental income that immediately offsets management fees and startup costs and without prolonged periods of negative returns, and no waiting for a cash flow turnaround.

The bigger difference shows up on the way back up. A more cyclical real estate private equity fund resembles a rocket ship on paper: a downward slope for the first few years, then a sharp move higher at exit. In general, NNN doesn’t work that way. The climb is steadier, more consistent and predictable.

That reliability is baked into the structure of a triple-net lease. Like any commercial lease, the tenant pays rent, but in an NNN structure, the tenant also absorbs operating expenses and associated inflationary creep. The landlord collects rental income, and the tenant handles the rest, including:

• Property Taxes. All taxes and assessments associated with the property
• Insurance. A commercial policy that covers the building’s physical structure and general liability
• Maintenance. All building operating costs, including utilities and repairs

Growth isn’t built on hope. There’s no waiting for the right market window, no betting on cap rate compression, no speculative exit valuation. Instead, rent typically escalates on a contractually predetermined schedule (i.e., 1 percent to 3 percent annually).

That changes what total return looks like. A traditional real estate private equity fund relies almost entirely on back-end capital gains to hit IRR targets. Net lease flips that dynamic: The bulk of the return comes from steady, recurring cash distributions rather than a single liquidation event at the end.

Net lease won’t deliver the explosive upside of a well-timed buyout, but the climb is potentially more reliable. It’s a deliberate trade, giving up the home run swing for a dependable singles-and-doubles approach. For institutional investors match-funding long-term assets and liabilities, that’s exactly the trade worth making.

Certainty as a competitive advantage

That structural certainty elevates net lease from a simple income play to a strategic stabilizer. A typical NNN lease spans 15 to 20 years, insulating the asset from short-term market volatility. The tenant pays rent whether a favorable transaction market is open or shut, and because total return is anchored in scheduled cash distributions rather than a terminal exit, the strategy doesn’t need a functioning liquidity market to deliver on its underwriting.

In volatile markets, many allocators willingly accept a lower going-in cap rate because cash flow predictability is worth the premium. Layering net lease into an alternatives allocation builds a reliable, early stream of distributions directly offsetting stalled realizations on the more cyclical side.

Bottom line

The current market dislocation has exposed a real vulnerability in portfolios built entirely around steep, back-loaded J-curves that assume exits happen as modeled.

Net lease offers an alternative path: a shallower early dip, a steady climb and IRRs driven by current rental cash flow rather than a future liquidity event. For allocators navigating today’s exit gridlock, that’s not just an attractive feature. It’s what real estate private equity is struggling most to provide right now: visibility.

Todd Stender is managing director of LNL Capital, a real estate investment company focused on providing capital solutions to the U.S. net lease real estate sector.