Why Net Lease Has Staying Power
Charleston, SC (January 1, 2018) – By Chris Sands, Founder & CEO, Sands Investment Group. When Federal Reserve officials continue to signal intent to hike interest rates, it is timely to share why net lease investment remains a steady choice for investors seeking stable wealth creation options to further diversify their portfolios. Even with a stock market at historic highs, net lease investments provide a path to certainty and wealth preservation. Following are reasons why net lease has staying power despite the inevitable market corrections and varying economic cycles.
Simplicity – With the triple net structure, the tenant is responsible for all building operation expenses plus (at times) external portions of the real estate and roof structure. This provides simplicity of management for the owner, eliminating the need for them to check on the asset frequently. Furthermore, this allows for investment in multiple markets with little demand for day-to-day oversight.
Transparency – A single tenant net lease asset provides the opportunity to know the corporate credit or franchise credit, thus providing a true understanding of the success of the operator at that location. Strong corporate credit or franchise backing is a guarantor that gives a level of comfort to the investor that the net worth or financial strength is even stronger than the lease obligation agreed upon — even if it’s a 10-or 20-year lease at rental rate. This creates a level of certainty in the transaction and provides reliability for the long-term occupancy. Moreover, reporting on store performance may be part of the lease obligation, providing even greater certainty and transparency to the owner.
Alignment – In net lease, the owner and tenant share duly-aligned interests in the success of the tenant and its business, especially if this is their sole source of income or one branch of a much larger portfolio. As an investor this can create a level of comfort that the tenant will remain for the term of the lease agreed upon.
Security – This is brick and mortar, not a stock, security or business interest that disappears leaving no value remaining in your investment. Ideally the investor is buying an occupied existing building. However, with single tenant vs multi-tenant property types, the challenge, (and upside) if the property becomes vacant is that you are only looking for one tenant. Moreover, there is a good chance you can re-lease at a higher rent, ultimately adding greater value to the investment.
Finally, net lease tends to fall into a sweet spot from an investment standpoint. Shopping centers, industrial and office buildings are likely at a valuation greater than the average private sector investor is capable of investing in. This is demonstrated by the fact that the greatest velocity of investment sales in net lease falls in the $1 to $5 million range. This provides for a much larger pool of buyers. In particular, at SIG we’ve built the firm to focus on sub-product type specializations which benefits both buyers and sellers as we can keep them in the market where there are is the highest level of stability and future growth.
For the long term, net lease will have staying power despite changes at the federal level or even with the tide of e-commerce influence on retail, and it remains a category accessible to those looking for strong wealth creation and wealth preservation options.
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