'Still Bullish' on Net Lease Retail Despite Economic Uncertainty
Investors ready to deploy capital in net lease retail will have options no matter how the landscape changes in the future
Despite some economic ebbs and flows as of late, certain sectors of net lease retail, particularly those more immune to tariff concerns such as service-based businesses, remain attractive to investors who are ready to deploy capital, W. P. Carey’s Michael Fitzgerald told GlobeSt at ICSC Las Vegas last week.
In this video, you'll hear:
- How Fitzgerald remains bullish on net lease retail amid the changing landscape over the last year;
- Why sale-leasebacks continue to be a popular deal type, and which types of retailers should consider them; and
- What sectors are seeing and will see strong demand from investors in 2025.
Watch now
An interview with Michael Fitzgerald, W. P. Carey, and Holly Amaya, GlobeSt.com.
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ICSC Las Vegas Preview
ICSC Las Vegas, one of the largest commercial real estate gatherings, will again convene the industry’s leading professionals and retailers next week. Over 30,000 attendees will gather for networking, deal-making and insights into how the retail real estate industry will fare amid a volatile and uncertain economic environment. Tariffs, shifts in consumer sentiment and sale-leaseback opportunities will be among the biggest topics discussed at the conference. Outlined below is an overview of each. Tariffs add pressure and uncertainty for retailers Uncertainty surrounding tariffs is expected to have a substantial impact on the retail real estate industry. The National Retail Federation announced it expects the growth of U.S. retail sales to slow down this year due to consumer anxiety and inflation, with an outsized impact on smaller retailers and certain industries including textiles and electronics. While the long-term impact of tariff policies is unclear, retailers ultimately will have to determine how much of the additional costs they can absorb versus passing on to consumers. These decisions could have significant impacts on retailers’ balance sheets and ability to remain operational, affecting overall investment in the sector. Consumer sentiment shifts will impact investor demand Shifting consumer preferences continue to present both opportunities and challenges for retailers. Uncertainty surrounding the future of the economy has made consumers more budget conscious and focused on necessities. According to the U.S. Bureau of Economic Analysis, essential goods account for 65% of consumer spending. As a result, retailers will likely continue to show interest in grocery-anchored shopping centers, which continue to remain among the best-performing retail property types. E-commerce also continues to redefine retail. As more consumers shift their spending online, retailers like Macy’s are consolidating locations and shrinking their footprints. For investors seeking stability, this means targeting markets with strong population and job growth—where retail assets are most likely to perform well over the long term. Sale-leasebacks remain a viable financing option Despite economic uncertainty, the retail sale-leaseback market continues to grow—thanks to its clear advantages over traditional debt. By unlocking the full market value of their real estate, retailers can reinvest proceeds into their core business and drive stronger returns. Sale-leasebacks also provide long-term capital with no refinancing risk and typically without the restrictive debt covenants or balloon payments that come with conventional financing. In today’s climate, where liquidity and balance sheet flexibility are paramount, that kind of stability is more valuable than ever.
The Future of Net Lease Retail
Retail investors in 2025 face shifting market conditions, including tariff concerns, interest rate volatility, higher construction costs, and increased institutional competition. According to Michael Fitzgerald, executive director and head of US retail investments at W. P. Carey, these forces will continue to influence retail investments in the months ahead. “You have many factors pushing cap rates in different directions, with new entrants and fresh capital coming into the market,” says Fitzgerald. “That increased demand naturally drives rates down. But at the same time, rising 10-year interest rates and investors trying to protect their spread are pushing cap rates up. In the end, we’ve actually seen some stability since this time last year.” Still, in the current conditions, investors are reassessing how they evaluate risk, structure leases, and identify long-term value. Pressure Points Grow Rising construction and financing costs as well as the increasing cost of imported goods have become pressure points across the sector. According to Fitzgerald, those costs translate to higher rents, especially for new sale-leaseback deals. Even with those increases, Fitzgerald emphasizes that the need to ensure profitability still holds up at the store level. “We need to make sure the metrics still make sense,” he says. Additionally, inflation has made flat leases a tough sell for investors. “It’s fair to say the age of flat leases is over,” adds Fitzgerald. “Outside of grocery, there’s really not much appetite for retail leases with flat escalations.” Sale-leaseback Opportunities Remain Despite these headwinds, the retail sale-leaseback market has continued to see growth because the structure has basic advantages over other forms of financing. Sale-leasebacks offer long-term capital with no refinancing risk and typically without the restrictive debt covenants or balloon payments of traditional debt. As a result, companies that need capital and have a real estate footprint will continue to tap this form of financing despite overall higher cap rates. According to Fitzgerald, the best candidates for sale-leasebacks are growing retailers in healthy retail segments. This includes companies that provide discount non-discretionary products and services, convenience stores, service-based segments and fitness. How Disciplined Investors Move Forward When evaluating retail assets, Fitzgerald emphasizes the EBITDAR-to-rent ratio as a key metric. “It’s the single most important metric for understanding whether a retail location is a good long-term investment. Locations with a history of consistent profit will tend to stay open and can support a fair amount of rent.” Beyond that, Fitzgerald highlights that W. P. Carey also looks at the rent relative to market and the cost basis of the property relative to its construction cost or replacement cost. The corporate credit profile also plays a major role. Fitzgerald emphasizes he often looks for companies with strong credit, market leadership, conservative capitalization, solid management, a proven track record of success, and a conservative approach to growth. “W. P. Carey has a strong history of smart credit underwriting, and in some cases, our deep understanding of credit allows us to pursue investment ideas others will not.” Despite changing market conditions, Fitzgerald believes disciplined investors still have room to thrive. For instance, he points to W. P. Carey’s access to capital, as well as their overall balance sheet strength. “We are differentiated by our large balance sheet that allows us to make all-cash offers at large scale without any financing contingencies. This enables us to consistently offer certainty of close, which is often the most important factor sellers point to when choosing a sale-leaseback partner.”
Retail's Latest Transformation Has Investors Watching
Retail has been the commercial real estate chameleon, changing and adapting with the times, including the rise of e-commerce and COVID-19. The post-pandemic rebirth of the sector has made major headlines and many retail operators and owners see flying colors. Michael Fitzgerald, executive director and head of US retail investments at W. P. Carey, sees three major trends that sector stakeholders should be watching: the strength of needs-based retail, a development switch favoring sale-leaseback investors and the continued recalibration of buyer-seller expectations. Targets & Tactics “An interesting thing about COVID was how resilient certain areas of retail actually were,” said Fitzgerald. “We saw immediate and sustained growth after that short period of shutdowns.” Non-discretionary, core-good retail including grocery stores and services-based tenants, such as auto services, have been “very strong,” according to Fitzgerald. Low-cost discount stores are a good place to do deals given the economic worries. And family entertainment centers, such as arcades and bowling alleys with full-service restaurants, have seen sustained periods of same-store sales growth and high profitability, benefitting from the post-COVID pent-up consumer demand. “When you’re very flexible, have tons of ability to evaluate business models, take a partnership approach and meet with management teams to understand how they position themselves in the market, you’ll have a lot of good investment options,” said Fitzgerald, who prefers master leases of 15- to 25-year term with escalations every five years. “We can do anything from convenience stores to an automotive service business to grocery and sporting goods. We’re pretty agnostic as to the types of retail we pursue.” Rate Responses As the impact of rising interest rates continues to unfold, Fitzgerald has found that most tenants and retailers are somewhat hesitant to raise their prices so as not to alienate or even “destroy” their customer base. There’s an opportunity to boost profitability, but also a concern about the outcome if companies go down that path and then the economic “switch flips” and customers stop spending. Increased interest rates affect retail development negatively, but Fitzgerald believes a specific shift in that regard that could yield investment opportunity. Retailers planning to grow their footprint have traditionally partnered with merchant developers, but with higher capital costs the latter’s return requirements “have increased significantly” and, in turn, their hiked asking rents have forced retailers to look for alternatives. As a result, retailers are doing more of their own development, whether in-house or through fee developers. “So a lot of these developments will be held on the balance sheet of retail companies, which is good because a lot of companies will likely decide to do sale-leasebacks,” he said. “Given that’s our company’s prime target, we think that’s a good trend to come from the higher rates.” Outlook Fitzgerald maintains that it’s still too early to make a prediction for overall transaction volume in the retail sector in 2023, adding that since last fall cap rate expectations have gone up 45 to 50 basis points in many cases. “What we’re seeing is that retailers that need to grow their footprint and monetize new developments are going to meet the market and are going to do deals,” he said. “If retailers continue to meet the market I think it’ll be a good, active year. If there’s a standoff I think it’s going to be more difficult.”