Why Strong Portfolios Include Net Lease
In volatile times, stability matters.
A well‑designed investment strategy starts with balance, just like a well‑run vessel depends on the right ballast to stay steady on open waters. In the same way, a thoughtfully selected net lease acquisition can bring stability, diversification and long‑term strength to your commercial real estate portfolio.
Equities are important but can be frothy and volatile. The current VIX volatility index is around the long-term average but spikes regularly. Much of the value of the S&P 500 index is balanced on a handful of tech stocks. The 10-year Treasury Note yield at the end of January was roughly 4.25 percent—much higher than the mid- to high-2s it resided in for more than a decade but moving through uncertainty. Crypto? Bitcoin has been on a roller coaster and is currently at approximately $84,000.
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Commercial real estate in general adds stability and longer-term wealth-building for a sophisticated investment portfolio. The business cycles are much longer, smoothing changes and providing a more stable financial foundation.
Research in 2024 from the Pension Real Estate Association shows that real estate has performed extremely well in average annual net total returns and expenses from 1998 to 2022 compared to other assets. Private equities were top of the list at 11.83 percent. Next came REITs at 9.74 percent. U.S. small caps were at 9.71 percent while large caps brought in 9.25 percent. Non-U.S. stocks came at 7.93 percent, then private real estate at 7.65 percent.
Everything else—other real assets, U.S. long bonds, non-U.S. fixed income, hedge funds, U.S. broad fixed income and US other fixed income—performed more poorly.
Net lease is a particularly valuable type of CRE investment. It has three distinct value paths. One is property valuation growth. The second is net operating income, so even if there are changes in valuation from unexpected circumstances, the investor can continue to see a return from the cash flow. Finally, there are tax benefits.
The 5 steps to net lease
Net lease helps a portfolio when investors who want to build wealth use it strategically. That takes a series of five choices: the right types, locations, timelines, tax treatments and exits.
When considering the types of net lease, first decide whether you are considering a standalone site or a multi-tenant center. Standalone in a good location can be good, especially for a national tenant with good credit with a long lease. However, multi-tenancy provides a way to create better balance for increased customer attraction. Depending on the investor’s interest, the choice might be retail, industrial, medical office building and possibly general office, although given the particular market and its complicated situation, it has to be the right situation. Consider both the size of the needed investment and a market gap analysis.
Location choices bring a tradeoff between useful concentration of similar or complementary nearby businesses to draw more traffic or over-representation that could reduce the potential for success. Will there be a need for a drive-through for a business? Lot parking rather than street? The home and work demographics of the area will help determine the potential total market. There is also the decision about whether to take a performing asset or look at a value-add strategy.
When considering what opportunities are best, also consider the timeline for the investment. Some investors will hold for longer, possibly to pass properties to children for estate planning purposes. Others might have a fixed timeline to exit a position within a set number of years.
Tax treatments, something to discuss with an expert in the area, can reduce taxes and preserve more wealth. A 1031 exchange possibility, long-term depreciation to lower taxable income, interest deductions, or cost segregation studies to accelerate certain deductions with bonus depreciation.
And then come the potential exits that might inform any of the other steps. It might be longer-term as part of a portfolio, a 1031 property exchange or a sale at some point.
Net lease offers many options for contributing to an investment portfolio and creating wealth, security and financial stability.
Jonathan Hipp is principal, capital markets, & head of the U.S. net lease group for Avison Young.
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