The Net Lease Market Finds Its Footing
Bid-ask spreads are narrowing and deals are penciling out more easily on both sides
Net lease investors have been on a wild ride over the last few years. The large run-up in benchmark rates beginning in 2022 created challenges around pricing expectations. However, Jason Patterson, executive director, investments at W. P. Carey, notes that despite some trade volatility and other factors, more stability in long-term rates over the past two years has helped those on both sides of a transaction find more common ground on where pricing should land.
Bid-Ask Spreads Narrow as Pricing Stabilizes
For much of the reset period, sellers were anchored in 2022-era valuations, while buyers priced deals on materially wider rates, and that gap has begun to narrow. “A slightly more range-bound 10-year Treasury provides some confidence on where pricing should shake out,” says Patterson.
He adds that increased capital inflows to the net lease space have also further compressed bids, driving more transactions to pencil out on both sides. Where sellers once struggled to meet the market, a more stable pricing environment has made that alignment more achievable.
Tighter Credit Spreads and Sale-Leasebacks Support Deal Flow
Patterson explains that credit spreads broadly had been near record lows until recently, a condition that he describes as helping keep cap rates from widening significantly. Tighter spreads benefit net lease investors both in how deals are capitalized and in the cap rates at which tenants and developers expect to transact.
Patterson notes that he expects to see an increase in sale-leaseback interest driven by a pickup in private equity and M&A activity. He also adds that lower short-term rates may stimulate deal flow in private equity, and a change in ownership often serves as the catalyst for a sale-leaseback arrangement.
Moving forward, Patterson points to interest rate volatility and credit as two of the most important factors for net lease investors. Rate volatility, he notes, can quickly undermine returns.
He also flags credit as a persistent area of focus, noting that while recent headlines have raised broader concerns, the long-term nature of net lease real estate may make those risks more muted than in other sectors.
And as the market moves into a more active phase, those who keep a close eye on both will be best positioned to capitalize on what Patterson sees as a period of growing opportunity ahead.
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What’s Next for Net Lease?
The effect of rising interest rates registers in many ways around the real estate world, but perhaps the starkest impact can be seen in the investment volume differential in one of CRE’s most popular sectors. Net lease investment volume decreased roughly 35% year over year in the third quarter, according to Jason Patterson of W. P. Carey. The VP of investments at one of the largest diversified net lease REITs notes the Fed’s impact on market players has been far-reaching. “Net lease volume prior to the Fed moves had been near or at record levels so the run-up in rates certainly impacted people getting on the same page with the value of real estate or what they were willing to commit to on a cap rate basis,” Patterson said. “A high level of volatility in a space where people are making long-term investments is not the ideal environment.” A Debt Market in Disarray Call it a pause, a disconnect, or total debt market disarray, 2022 has brought major headwinds to a CRE industry and net lease sector that have gotten accustomed to cheap capital. Yet, Patterson reports still seeing a lot of attractive opportunities in the market. “Private equity-backed sellers or tenants continue to use sale-leasebacks as an attractive form of unlocking tied-up capital in their acquisitions, a counter-inflationary move that in some cases has been beneficial to us,” he said. “They’re viewing it more and more as a regular, very attractive component of the capital stack, which I think is good from a broad industry perspective.” Unencumbered by rising capital costs, equity investors have certainly found more room to work within the net lease market “The current environment favors people in a high certainty or all-cash type of capital structure like W. P. Carey,” Patterson said. “We’ve seen increased focus on certainty of close as levered buyers signed up for deals maybe in the early part of the summer and then with rising debt costs their assumptions didn’t pan out. You see deals come back to market as more investors have to reevaluate pricing in this period of volatility.” 2023 Outlook Citing the first half 2022 industrial deal volume exceeding more than 50% of the STNL market, Patterson forecasts that industrial product will continue to be a very attractive investment target. He added though that not all industrial product types are created or viewed equally. “Rather than just lump everything into broad industrial, we’re looking for real estate that is extremely critical to operations for our tenants,” he said. “Maybe we’re willing to give up a little bit in terms of fungibility for increased certainty that tenants are going to renew and keep paying rent for the long term. Asset classes such as cold storage and food production are extremely important to users and they don’t have a ton of alternative options available.” A $75 million sale-leaseback W. P. Carey completed in the second quarter embodies the above trends. The 25-year net lease for six mission-critical specialty manufacturing facilities totaling approximately 1.1 million square feet in three countries is backed by private equity. “There continue to be more and more deals getting done with private equity sponsorship, and we’d expect that to largely continue in 2023,” Patterson said. “The trend, a positive one for the industry, really is private equity ownership looking toward sale-leasebacks.”
Sale-leasebacks Are Back!
The sale-leaseback market is booming. Strong fundamentals including low interest rates, outsized demand for high-quality assets, an active M&A market and significant amounts of capital driven by cheap debt and strong currency make now an opportune time for sellers to execute a sale-leaseback and unlock otherwise illiquid capital tied up in their real estate. According to data from SLB Capital Advisors, sale-leaseback activity increased 17% in Q2 from the previous quarter, reaching $3.6 billion–the second highest in terms of deal volume since before the pandemic in Q4 2019. With interest rates unlikely to rise in the short term and property valuations being pushed higher as new investors enter the sale-leaseback market, we expect this high level of activity to continue into 2022. However, within the broader sale-leaseback market, each core property type–industrial, office and retail–faces unique headwinds and tailwinds, presenting new challenges and opportunities across each. Here’s how we think each will fare in 2022. The Industrial Surge The industrial real estate market continues to be one of the strongest sectors fueled by tailwinds related to the growth of e-commerce, including increased inventory requirements and record-low vacancy rates. These strong fundamentals mean that investor demand for industrial sale-leasebacks will only increase, particularly as new entrants enter the market. We are already seeing the effects of this–but as more entrants enter, the imbalance between the product available and demand for assets will continue to widen, driving prices higher and cap rates lower–even in traditionally non-core industrial markets. In addition, a lag in new development due to increased material and labor costs will keep real estate valuations for existing assets high. As a result, we don’t see the industrial market slowing any time soon–creating immense opportunity for sellers to maximize the value of their real estate through a sale-leaseback. Growing Office Optimism While office has certainly been a dark horse in the real estate market due to lockdowns and work-from-home mandates, there’s some optimism on the horizon going into 2022. Several big tech companies such as Google, Facebook and Amazon, have made investments in NYC office space this year, sparking early signs of recovery in the sector. In addition, Sun Belt markets such as Texas and Florida–where many urbanites migrated during the pandemic–are seeing an increase in demand for offices supported predominantly by the small and mid-size businesses located in those regions. For potential sellers, these are all positive signs and suggest that investor demand for certain office assets will rise in 2022, particularly for high-quality properties in strong markets leased to investment-grade tenants. Retail's Road to Recovery Similar to the office market, retail is seeing a recovery from COVID-19 pandemic lows. Retail foot traffic and sales continue to increase, but the rise of e-commerce has certainly left a lasting impact on the industry as a whole, as most retailers are now implementing hybrid store models which include both brick-and-mortar stores and online distribution. In the next few years, many retailers will likely reevaluate their portfolios in terms of number of stores, location and use–and many may downsize as online orders become a greater proportion of their sales. As a result, the overall level of occupied retail space will likely shrink, meaning the market will favor corporate sellers and tenants. In addition, we expect investor demand for essential retail such as grocery and quick-service-restaurants will remain strong in 2022, as those sectors have demonstrated exceptional resiliency during the pandemic and resulting economic downturn. We’ll likely also see an increase in volume of retail sale-leasebacks in Europe, particularly for those essential assets, as US-based investors expand into new markets to take advantage of different costs of capital. What's Next Overall, the outlook for sale-leasebacks remains positive across all three core property types, with 2021 shaping up to potentially be a record year for deal volume. As long as the market fundamentals remain strong, corporate sellers pursuing a sale-leaseback will be able to secure high valuations for their real estate assets while locking in current low rates for the long term. Working with an experienced sale-leaseback investor such as W. P. Carey ensures sellers unlock 100% fair market value of their assets–which can be reinvested into growth initiatives–and also provides a long-term capital partner that can support future real estate needs.
Sale-leasebacks Gain Momentum as Global M&A Values Grow
Private equity sponsors are rethinking how they access capital as the M&A market heats up. Global M&A values have climbed to $1.89 trillion in the first half of 2025, meanwhile fluctuating interest rates and tighter financing make traditional methods of raising capital less appealing. “The tighter rate environment is a moving target, particularly with the recent rate cut,” says Jason Patterson, executive director of investments at W. P. Carey. “As a general rule of thumb, alternative sources of capital, such as sale-leasebacks, are attractive right now, especially if you’re having trouble securing debt in a more structured transaction.” As firms look to move forward in the current market, many are finding strategic opportunities with sale-leasebacks to tap into capital, both before and after M&A deal closings. Capturing Flexibility Pre- and Post-Acquisition For private equity firms, a sale-leaseback offers flexibility throughout the merger and acquisition process. In the pre-acquisition phase, this strategy helps reduce equity requirements. “This can lower the equity needed to close, which is especially attractive at the start of an M&A deal,” says Patterson. On the post-acquisition side, Patterson notes that a large amount of capital often remains tied up in real estate, and that sale-leaseback proceeds can support new acquisitions, or fund reinvestment in the buildings themselves. Because of this flexibility, Patterson is seeing more sponsors incorporate sale-leasebacks into their regular strategies. Securing Certainty and Speed Patterson stresses that execution speed and reliability are critical when incorporating sale-leasebacks into a strategic playbook. “Having someone you can be certain is going to provide the capital necessary to close that acquisition on time is of the utmost importance,” says Patterson. As an example, he points to a transaction in which W. P. Carey funded more than $400 million at closing for a large pharmaceutical manufacturer. “It took a lot of coordination and trust among the parties,” says Patterson. “But having that certainty was extraordinarily valuable to the sponsor because they didn’t have to call their own capital or raise additional debt to fund the transaction.” Patterson also explains that groups sometimes lack sufficient information about the real estate transaction to even consider a sale-leaseback until they are near closing, which is why having a partner who can move quickly and reliably is important. Putting Proceeds to Work Once a sale-leaseback is completed, the proceeds can be deployed in a variety of ways. Patterson notes that some groups use the capital to grow the business or expand production. In other cases, proceeds might go toward paying down debt when the cost of funds under a sale-leaseback is more attractive than traditional financing. Patterson believes this flexibility could drive wider use of the strategy in future M&A transactions. “Many groups don’t always appreciate [that] they’re literally sitting on some of the most valuable sources of capital they have in the real estate they own,” says Patterson. “And as more become familiar with using sale-leasebacks as a strategy, I think it’s possible that it could increasingly be used in the M&A process.”