Despite Changes in the Net Lease Market, Returns Still Attractive to Investors
“It is the larger sized deals where cap rates are moving.”
Net-leased healthcare assets owners across the US are seeing assets that might have sold for a cap rate in the mid-fives last year now trading with cap rates in the 6 percent range according to the Ben Reinberg of Alliance Consolidated Group of Companies.
Although Reinberg’s isn’t one size fits all in terms of current net lease transaction climate, it does help to show the approach some sellers are taking. Referring to a building he personally sold, “We wanted to sell and we didn’t want it to sit for however long it would take to get back to the mid 5s. Who knows, it could soon be at a 6.5 cap rate,” adds Reinberg. Due to client confidentiality, he refuses to disclose any other information regarding the transaction.
As buyers and sellers gauge rates and prices, analysts point out that deal flow is marginally slowing down. With many sellers clinging to market characteristics from a few months ago, a gap between offer and asking prices is starting to appear.
According to Reinberg, “…A lot of folks are holding onto assets especially if they have a good yield, and buyers have to protect themselves on pricing as the cost of capital rises.”
Inflation, rising interest rates, and fluctuating cap rates are important factors within the asset class, but like everything else with net lease, moderation and stability remain its distinguishing traits.
Although the current state of net lease is a little “off,” its risk-adjusted returns are still quite attractive, according to Will Pike, vice chairman and managing director of CBRE’s Corporate Capital Markets group and the Net Lease Property Group. “It is still active even if pricing is changing.”
Take for example, a property may have traded with a cap rate in the low to mid 3s at the beginning of the year. Now, that same property might sell for a cap rate in the low to mid-4s, especially for larger-sized deals.
Pike stated that there hasn’t been any movement in the $3 million to $8 million price bracket. “The upper 3s are still in force with them. It is the larger sized deals where cap rates are moving.”This is simply a matter of various capital buckets for private deals and institutional ones, he argues, and the larger sized deals are where cap rates are moving. According to Pike, “The higher-yielding deals at smaller price points are seeing less of an impact while higher price point transactions that are lower yielding are more affected.”
He comes to the conclusion that net lease is in a fantastic position overall. “It outperforms the greater CRE market during times of crisis. It had a higher share of the overall CRE market during COVID-19 and the Great Financial Crisis. It does well because of the dependable nature of its cash flow.”
Our Orange County commercial real estate brokers will help you every step of the way in finding the right commercial investment property, contact us for details.