The Institutionalization of Net Lease
Jason Patterson of W. P. Carey looks at the influx of institutional capital in the net lease space in this exclusive article.
The net lease market has become a hunting ground for investors looking for low-maintenance assets and long-term, predictable cash flows. The stability of the asset type during times of uncertainty has attracted attention from new investors – with the net lease share of all commercial real estate investment activity rising 14.7% in 2020. While it has historically not been viewed as one of the major food groups in commercial investments, this perception is changing as more capital continues to flow into the market.
What's driving new capital?
There are several factors that have contributed to the influx of capital in the net lease space, but the biggest factor is the appeal of long-term stability. With reliable cash flows, triple-net structures and generally longer lease terms, net lease investments are far less volatile than other assets and create predictability in a portfolio. While there was wide discrepancy across the net lease sector during COVID, generally net lease portfolios – particularly industrial and those focused on critical real estate – performed extremely well and delivered high rent collections when compared to other asset types. In addition, recent inflation fears have driven investors toward traditionally inflation-resistant asset classes like real estate, and net lease in particular has been popular in that context.
What types of institutions have shown the most interest in the sector?
There are several factors that have contributed to the influx of capital in the net lease space, but the biggest factor is the appeal of long-term stability. With reliable cash flows, triple-net structures and generally longer lease terms, net lease investments are far less volatile than other assets and create predictability in a portfolio. While there was wide discrepancy across the net lease sector during COVID, generally net lease portfolios – particularly industrial and those focused on critical real estate – performed extremely well and delivered high rent collections when compared to other asset types. In addition, recent inflation fears have driven investors toward traditionally inflation-resistant asset classes like real estate, and net lease in particular has been popular in that context.
What does this mean for corporate sellers?
Now remains a great time for corporate sellers to monetize real estate. High investor interest and limited supply is driving cap rates down and prices up, meaning sellers can maximize the value of their assets if they pursue a sale-leaseback now. Supply chain issues have highlighted the importance of industrial properties in particular, resulting in further price appreciation for industrial owners. Since there is an expectation that interest rates will rise next year in response to inflation, corporate owners should take advantage of the sellers’ market and pursue a sale-leaseback sooner rather than later to lock in today’s low rates on a long-term basis.
Conclusion
Although new entrants entering the net lease space are forcing cap rates down, the overall impact on the market is a net positive. Greater investor interest is also driving down cost of capital accordingly, meaning investors can still accretively do deals at lower cap rates since debt is relatively cheap. In addition, increased visibility of the net lease market lends credence to the asset class as a whole and creates more awareness for net lease and sale-leasebacks among corporate sellers – driving overall deal volume higher.
From W. P. Carey’s perspective, 2021 has been a record year for deal volume and we have been able to support many companies in unlocking the value of their real estate and redeploying those proceeds into their core businesses…So bring on the competition!
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That's reflected in deal volume to date, as well as many of the guidance numbers for 2026, he adds. Across the board, it’s safe to say that REITs have been preparing for an acquisition spree. “Operationally, REITs are very much ready to handle a significant increase in number of properties, and some of that's being helped by the technology investments that companies have been making to be efficient and manage more with less,” says Matthew Werner, managing director, REIT strategies, at Chilton Capital Management. REITs also have worked to strengthen balance sheets. Many are under-levered with some of the lowest debt ratios they’ve ever had and very low levels of floating-rate debt specifically. “They have tons of capital capacity, but except for a few sectors, their cost of equity doesn’t make sense for them to go and do transactions,” Werner says. 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The REIT kicked off 2026 with the January announcement of a $142 million acquisition of six skilled nursing facilities in the Mid-Atlantic region. “We've always said, if you’ve got it, flaunt it, and we’re seeing that now from a lot of these health care REITs where they are appropriately using that cheaper cost of equity to be acquisitive in the markets they operate in,” says Daniel Ismail, co-head of strategic research, managing director, at Green Street. Health care REITs have the added benefit of finding good buying opportunities within sub-sectors, particularly in senior housing, he adds. Net lease is another sector that has been leveraging its cost of capital advantage to make accretive acquisitions. And many of the same players that were active last year expect to keep their foot on the gas. 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However, the REIT is watching to see how the expectation of lower interest rates this year will play out in terms of pricing, sellers, and the competitive landscape. “One important misconception is that publicly listed and private capital are chasing the same assets,” he adds. “It’s important for investors to understand the size and scope of the net lease market and appreciate the divergent strategies and execution of the many players.” Positioning for Acquisitions On the opposite side of the spectrum, a number of sectors are trading at discounts to NAV of between roughly 10% and 20%, including office, apartments, industrial, self-storage, and lodging. REITs in those sectors are still buying assets, but they are less active. “It will be hard to see them ramp up acquisition activity throughout 2026, and they likely will be highly selective in the type of deals they do,” Ismail says. 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MIPIM 2026: Where Capital, Conviction and Opportunity Converge
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Project Management Teams Deliver Big Value for Tenants
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