How Will Rising Interest Affect Your Net Lease Properties?

May 4, 2018

With rising interest rates on the horizon, many investors have begun to wonder what the impact on the triple net lease market will be.

According to some experts, while you may not see any changes right away, generally rising interest rates results in the slowing down of sales.

Since buyers aren’t sure how far the market will correct, they tend to take a wait and see attitude until interest rates become stable again. As a result, sellers will be forced to lower prices a bit in order to draw in reluctant buyers.

Once interest rates balance out, demand rises again and the market growth continues.

However even with an increase in interest rates, there will always be strong demand for triple net properties; in fact, most likely competition for premium NNN deals will become even more fierce.

Other experts are more pessimistic.

rise in interest rates could negatively affect the value of net lease properties

Since debt is at the heart of the majority of capital in the net lease sector, a rise in interest rates could negatively affect the value of net lease properties. This would naturally cause a decrease in investors willing to pay high prices for a net lease investment.

It’s also possible, according to this camp, that higher interest rates would result in higher yields in other asset types; those asset types that are less expensive than net leases would then be considered a better bet than net lease properties.

But while some investors agree that while theoretically debt underlies many commercial real estate asset types, they argue that many net lease transactions are purchased by investors purchasing a property with all cash.

These investors generally coming out of a 1031 exchange, or are working together with partners or other sources of funding. Others are foreign investors who prefer to invest in the U.S. net lease market in order to take advantage of the long-term growth potential or as a way or preserving capital.

positive growth

Higher interest rates are a sign of the positive growth of the economy because as inflation increases, consumers buy more, which means the businesses occupying net lease properties sell more and increase profits. Some of these businesses will then use their profits to expand their businesses, which means demand for more net lease properties should also increase. Thus, both all-cash investors and off-shore investors would be less sensitive to rising interest rates.

These experts also point to the fact that historically, research shows that triple net lease transactions have traded in a fairly tight range of 350 to 540 basis points above the 10-year Treasury during the last several years. This is comparable to investment-rated corporate bonds, which are priced based on the 10-year Treasury with spreads closer to 100 to 150 basis points due to less risk and greater liquidity.

The single net lease market might be more affected by rising interest rates, but it is expected that the asset types most likely to see change are retail. Investors are doing extensive due diligence in order to ensure the location and tenant are strong, and that the tenant has the potential to keep performing strongly in the future.

This won’t change anytime soon, especially since the retail market is up and down right now. Rest assured that these buyers will continue to do everything they can to ensure the tenant they are considering will be able to do well despite the changes brought on by e-commerce.

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