Net Lease Market Takes Stock, Looks Ahead to Post-Pandemic Activity
March 31, 2021
The one-year anniversary of the pandemic’s disruption is now in the rearview mirror. Accelerating vaccine rollouts are giving new optimism that the worst of the COVID crisis may finally be behind us. It’s time for commercial real estate professionals to start looking to the future and turn hopeful wishing into strategic planning. In the net lease sector, current trends and future possibilities paint a fascinating picture of what has transpired over the past year—and where net lease opportunities will emerge going forward.
What follows is a brief overview of where the net lease market stands today, and what might be in store in the weeks and months ahead.
Overall, the net lease space has generally been one of the brighter commercial real estate niches during the pandemic—for properties anchored by a company that’s viewed as a good risk. Single tenant net lease is a fairly liquid space relative to multi-tenant commercial properties. We’ve definitely seen a “flight to safety” and a “flight to quality” over the last year—a natural and expected reaction to more generalized pandemic uncertainty. Net lease opportunities have also been bolstered by the fact that there is still quite a bit of money out there, and interest rates have remained very competitive. That combination has helped fuel deals and kept prices high.
Markets or tenants?
While there’s always noteworthy market-to-market variability, and the contours of the net lease landscape can look quite different based on local and regional specifics, the net lease sector is generally not as geographically sensitive or market-sensitive so much as it is tenant-sensitive. That is perhaps truer now than at any time in recent memory. Industrial remains the hottest commercial real estate segment—at the opposite end of the spectrum from the hard-hit retail market. While sit-down dining has obviously taken a hit, single-tenant food use—particularly drive-up and fast/fast-casual concepts—also remain popular.
Net lease is a very specific niche. It’s difficult to say precisely how the market will respond as the pandemic impact wanes and we progress toward a “new normal.” It’s possible that attention could be redirected to distressed if more come to market. It’s important to recognize that net leased assets are certainly not immune to the ebbs and flows of the market (or even the surging tide of COVID-altered economic fluctuations). The fortunes of individual brands and businesses will be more of a predictor of performance when it comes to specific assets. With that in mind, the volatility we’ve seen over the last 12 months is something that bears watching. A high-profile company like Tesla illustrates how dramatically public perception can change in the course of a few short months. While the jury is still out as to what the office market will look like, the net lease office market will likely come back as things stabilize in mid-to-late 2021. The strength of that recovery will be based on credit quality and stability of individual tenants, as well as their ability to sort out their space needs and clarify their operational model going forward.
The bottom line
The bottom line is that there will always be a market for quality net lease opportunities. When it comes to new transactions, both buyers and sellers have tended to take a wait-and-see attitude during the pandemic—biding their time rather than taking things to market or aggressively pursuing deals. From that standpoint, as we emerge from the uncertainty of the pandemic fog—and get more clarity on where we’re headed and when things will really start to open up—that’s when things will truly take off. Until we get to that point, net lease transaction volume across the board (aside from the best-of-the-best credit tenants) will continue to be somewhat suppressed. Buyers looking at offerings in segments that aren’t bulletproof don’t want to be the first to move when there’s lingering uncertainty about where things are headed and what the post-pandemic market will look like. The good news is that picture is likely to be coming into view in the months ahead. With plenty of cash and lots of pent-up willingness to make deals, that general caution will give way to growing optimism and activity in what everyone expects to be a healthier and more economically dynamic back half of 2021.
If you’re interested in receiving a complimentary, no-obligation commercial real estate consultation, contact Farbman Group and get in touch with an expert today.
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