A net lease, in its essence, is a lease agreement in which the tenant assumes responsibility for additional costs beyond the basic rent. These costs typically include property taxes, insurance, and maintenance, hence the term "net lease." Net leases come in different forms, with the most common being Single Net Lease (N), Double Net Lease (NN), and Triple Net Lease (NNN). Each level of the net lease places a varying degree of responsibility on the tenant for covering additional costs.
Industry analysts are noticing a migration of institutional investors to the net lease product, in part because it offers stability and predictable cash flow, even with fluctuating interest rates. Net lease deals are often associated with long-term leases, providing stability and security for investors. Tenants, especially those with strong credit ratings, are more likely to commit to extended lease terms, ensuring a steady income for an extended period.
Another benefit of net lease deals that continues to attract investors is the protection against inflation. Net lease agreements often include provisions for rent increases tied to CPI or other economic indicators. This can act as a hedge against inflation, ensuring that the investor's returns keep pace with the rising cost of living.
According to data from Northmarq, the US industrial market for net lease real estate had its second strongest year even in 2022, with more than $40 billion in sales, and the office and retail net lease sectors posted numbers in line with average volume years. This happened during a rising interest rate environment, so as we see interest rates stabilize (and even decrease), we can expect a boost in net lease activity.
Given the nature of a net lease investment, they are very interest rate sensitive. This means that even a small change in interest rates can lead to a significant change in value. By understanding the nuances of net lease agreements, assessing tenant creditworthiness, and conducting thorough due diligence, investors can position themselves to benefit from the advantages these arrangements offer.
Justin Langlois, CCIM is a Commercial Real Estate Advisor with Stirling Investment Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.