Net Lease Investors Adapt as Economic Uncertainty Lingers
Interest rate volatility and trade policy shifts create uncertainty, but net lease activity is expected to pick up in 2025
Tariffs, interest rate fluctuations and macroeconomic uncertainties continue to reshape the net lease investment market. As these factors evolve, investors are working to make long-term decisions in an uncertain environment.
“There’s a lot of volatility, especially around tariffs and trade policy,” says Jason Patterson, executive director of investments at W. P. Carey. “It’s difficult for a CFO or CEO to commit to a 20-year lease when so many of these factors are changing day to day.”
This unpredictability has tempered deal volume, but as conditions stabilize, Patterson expects a resurgence in activity later in the year.
The Impact of Interest Rate Volatility
Interest rates have been a focal point for investors, particularly given their impact on pricing and transaction volumes. While rates have been trending downward recently, the past year has seen continued fluctuations, making it challenging for buyers and sellers to align on pricing expectations.
“Investors really track the 10-year US Treasury as a guidepost for risk and pricing,” Patterson says. “The volatility we’ve seen has widened the bid-ask gap in many cases, making it harder for deals to come together.”
He notes that as interest rates stabilize, market conditions should improve, leading to increased deal flow.
Sale-Leasebacks Still Attractive Alternative to Unlocking Capital
Uncertain economic conditions often prompt corporate real estate owners to explore sale-leaseback transactions as a means of unlocking capital. While Patterson hasn’t seen a major uptick yet, he expects that to change as 2025 progresses.
“There are early signs of increased sale-leaseback activity,” Patterson says. “While we haven’t seen a huge spike just yet, M&A activity has been improving, and sale-leaseback volume often follows that trend.”
He also notes that while uncertainty can sometimes deter companies from making long-term commitments, it can also push them toward alternative capital options, such as sale-leasebacks, to improve liquidity.
Preparing for What’s Next
With so much uncertainty, investors are focusing on proactive strategies to reduce risk and position themselves for long-term success. According to Patterson, much of this work happens upfront, from structuring leases with protective provisions to ensuring asset selection aligns with long-term needs.
“The good thing about net leases is that once you’ve bought a building and signed a lease, there’s an expectation of long-term stability and predictability,” he explains. “The key is making sure those early decisions — such as lease structuring and tenant selection — are as strong as possible.”
Active asset management also plays an important role. Maintaining strong relationships with tenants, tracking performance and being flexible with their needs can help investors handle potential challenges in the future.
While economic uncertainty continues to persist, investors who remain disciplined and adaptable will be well positioned for success, and Patterson remains optimistic about the net lease market in the months ahead. “I don’t see an impending cliff or major downturn,” he says. “The best approach is to stay informed, track policy changes and make smart, forward-looking decisions.”
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Net Lease Investors Eye Cross-Border Opportunities and New Property Types in 2025
The net lease market is positioned for change in 2025, with investors monitoring trends in geographic expansion and property types, as well as shifting economic factors. While the US remains a key market for many, international opportunities are gaining ground, particularly in Mexico, as noted by Tyler Swann, managing director of investments at W. P. Carey. “Mexico is a market we’ll be watching closely next year,” says Swann. “We’re seeing more sale-leaseback and build-to-suit opportunities there, particularly as more American and International manufacturers set up shop in the country.” Alongside these international prospects, investors are exploring new property types and preparing for economic factors like ongoing interest rate volatility and tariffs. By keeping an eye on these trends, investors can better position themselves for what’s next, says Swann. Geographic Expansion and Emerging Property Types While the US and Europe remain the cornerstone of net lease investment for W. P. Carey, Swann is monitoring other international markets, such as Mexico and Canada, for growth. “Our largest transaction in 2023 was in Canada,” he says. The country’s interest rates differ from those in the US, and Swann is keeping a close watch on how this impacts market pricing with an eye to expanding further if the opportunity exists. New opportunities in 2025 aren’t limited to geography, Swann notes. Some non-traditional property types are also getting a look from the net lease world. “We’re seeing more activity from net lease investors in the data center world,” says Swann. “Clearly, there’s a need for a tremendous amount of capital to fund the buildout of these new data centers.” However, he adds that W. P. Carey takes a selective approach, focusing on long-term leases to single tenants to ensure returns comparable to the company’s core industrial investments. Healthcare properties, particularly those in prime locations, are also attracting attention. “To the extent that we can find those well-located healthcare assets, I think that‘s something we’ll explore in 2025,” says Swann. Swann sees the key criteria for healthcare investments to be their proximity to population centers with favorable demographic trends and the asset’s importance to the local community. Continued Interest Rate Volatility and an Unpredictable Market As the net lease market heads into 2025, interest rate volatility remains a key concern for investors. Recent fluctuations in long-term Treasury rates have had a direct impact on asset pricing and overall investment strategies. “Long-term financing rates are also critical for how we price assets with long-term leases,” says Swann. “The uncertainty surrounding interest rates is compounded by economic factors, including potential deficit spending and the risks of future inflation.” Looking ahead, investors will need to remain flexible, evaluating opportunities, property types, and the broader economic trends to stay ahead of market shifts. “Interest rate volatility can actually benefit public REITs like W. P. Carey,” Swann notes. “We’re less sensitive to rate movements, which allows us to close deals even in volatile environments.”
Will the Net Lease Market Thrive in 2025?
The net lease industry has faced significant challenges in recent years, grappling with widespread economic uncertainty, soaring inflation and elevated interest rates leading to muted growth. However, a turning point came in the second half of 2024, when the Federal Reserve began cutting interest rates, ushering in lower cost debt and injecting some optimism into the market. While most industry experts believe net lease is poised for an upswing in 2025, the extent of the recovery remains in question. As the industry gears up to “thrive in ‘25”, here are three predictions for the year ahead. Transaction volume will likely increase, but uncertainty around interest rates will remain After three rate cuts by the Federal Reserve last year, real estate investors have gained more confidence in the market, signaling the beginning of a turnaround for transaction volume. Colliers latest outlook forecasts a 25-33% growth in aggregate volume in 2025, driven by a strong economy, improving fundamentals and growing demand for key asset classes. The bid-ask spread between buyers and sellers will also continue to narrow in 2025, supporting more robust investment activity. However, the predicted boost in transaction volume is largely tied to the future of interest rates which is uncertain. The timing and pace of further rate decisions will depend on many factors, including the impact of the incoming administration’s policies – mainly surrounding tariffs and immigration – on inflation. Net lease investors will explore new property types as technology and innovation drive trends Shifting economic factors and trends will also likely lead to a change in where net lease investors will look to allocate their capital. One of the fastest growing sectors over the past year has been data centers, which have seen a huge uptick in demand because of growing digital infrastructure needs and the advent of artificial intelligence. The average vacancy rate among primary North American data center markets in 2024 hit a record low of 2.8%, according to CBRE. The firm also forecasts the average preleasing rate for data centers to rise to 90% or more in 2025. Another sector to watch is healthcare, with an aging population, growing healthcare spending and new technologies supporting increased investor demand. In particular, medical outpatient buildings are well-positioned to benefit from these trends, in addition to shifting consumer preferences for accessing healthcare in more convenient locations. Industrial and retail will remain steady as positive tailwinds support demand Despite new sectors potentially drawing investor interest, the net lease sector will remain underpinned by two of its core property types – industrial and retail. Driven by e-commerce needs, warehouses and other industrial real estate properties are still in demand. In Q3 2024, industrial vacancy rates dipped slightly to 6.7%, according to Moody’s CRE. Furthermore, changes in trade policy will likely boost demand for industrial facilities near the U.S.-Mexico border – bolstering markets such as San Antonio, Austin and Dallas/Fort Worth. Retail enters the new year with the lowest vacancy rate of any commercial real estate sector and will remain steady throughout 2025. Demand for retail continues to be primarily driven by location – with assets in densely populated areas garnering the most investor interest. Increased consumer spending as a result of easing inflation will also be a positive tailwind for retail growth in 2025.
Keeping Up with Industrial in a ‘Wildcard’ Year
Uncertainty around interest rates, slowed transactional volumes, and a future of unknowns has left investors in the industrial sector watching trends closely. “This year has been a bit of a wildcard,” says Jason Patterson, senior vice president of investments at W. P. Carey. “People constantly speculate about what the future holds regarding interest rates, and we also saw a bit of softening on the lease demand side at the end of 2023.” As uncertainty persists, understanding a few key trends can help the industrial sector track what’s next as it moves closer to a new normal. Cost of Capital Challenges Persist As 2024 began, forecasts predicted multiple interest rate cuts; however, the Fed has held rates unchanged to date. Recently, it adjusted the previous forecast from three expected rate cuts in 2024 to one, against the backdrop of persistent inflationary concerns. Volatility around rates has also led to investor hesitancy in making long-term commitments, further impacting transaction volumes. “There is also a long and continuous trend toward e-commerce,” says Patterson. “In the near term, there has been a bit of volatility due to overbuilding in certain markets, and there is a bit more vacancy that needs to be absorbed. These shorter blips are relative to what seems to be a long-term trend toward higher value in industrial real estate.” Despite ongoing challenges, opportunities still exist for the industrial market, and understanding some existing tailwinds can help investors capitalize on these. Shift to Onshoring Onshoring is a continued tailwind for the industrial sector, especially on the manufacturing side according to Patterson. “It seems there is bipartisan agreement around a movement to onshore, as sentiments trend toward increased American manufacturing.” Upticks in high-tech chip manufacturing and transitioning the auto fleet to electric are also drivers of long-term industrial demand, says Patterson. While electric cars accounted for only 2% of vehicles in 2018, that number jumped to roughly 18% of all vehicles sold in 2023. A push toward more sustainable vehicle technologies could further drive long-term industrial demand, but Patterson cautions that continued growth could depend on the outcome of the election. Strategic Positioning and Access to Capital When operating in a market with many unknowns, a good place to start is focusing on what’s within your control, suggests Patterson. “Factors such as interest rates are out of the hands of most folks,” says Patterson. “We focus on sticking to our competitive advantage, which is underwriting sub-investment-grade long-term lease opportunities.” Agility is also key, as is working with partners who can support the market’s need for increased flexibility. According to Patterson, “This is a time when having a reputation for strong performance and access to capital is very valuable. At W. P. Carey, we are well positioned to execute with significant liquidity and capital, enabling us to be nimble in the current environment.”