Why Net Lease Continues to Draw Investors
Net lease performance amid rising interest rates has W. P. Carey “bullish”
The net lease retail sector continues to outperform despite changing interest rates, with a growing number of retailers expanding their footprints or developing new properties against a “compelling” cap rate environment.
That’s according to Michael Fitzgerald, executive director, head of US Retail, W. P. Carey, who told GlobeSt at ICSC Las Vegas that many retailers are “aggressively expanding” in their markets.
“We’ve seen a lot of activity in sale-leaseback and we are bullish on net lease retail,” Fitzgerald says. “The retail sector is enormous – and we’re chasing deals.”
Fitzgerald also discusses:
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The state of retail fundamentals
- How investors are responding to changing interest rates and economic uncertainty
- What makes W. P. Carey stand out from its competitors in terms of investment opportunities
Watch now
An interview with Michael Fitzgerald, W. P. Carey, and Holly Amaya, GlobeSt.com.
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Why Institutional Capital Continues to Embrace Sale-leasebacks
As more corporate and private equity firms have turned to sale-leasebacks, deal volume has continued to grow compared with 10 or 20 years ago. That growth has caught the attention of institutional investors, such as J.P. Morgan Asset Management and Goldman Sachs, who may have previously viewed net lease or sale-leaseback as a niche asset class. “I think as the market has grown, those asset managers have realized that there’s real scale to this market and a real opportunity even for the largest firms,” says Tyler Swann, co-head of North American investments at W. P. Carey. For investors considering sale-leaseback strategies, that growing interest raises questions about how these assets hold up through market cycles and whether increased investor demand is changing pricing. How Critical Real Estate Weathers Market Cycles Swann explains that the sale-leaseback market has an investment track record long enough for investors to see how well assets performed during past market cycles. He also notes that the assets are usually very important to the companies operating them. As a result, even during downturns, companies need the real estate and tend to stick with it. “If you buy highly critical real estate under well-structured leases, that asset tends to remain essential to a tenant’s business,” says Swann. He notes that you can’t necessarily say the same for debt or equity investments, which are more heavily impacted by economic cycles. Swann adds that W. P. Carey is a long-term investor and is less impacted by short-term market downturns, given the company’s leases generally run 15 years or longer. Rising Rates Haven’t Yet Cooled Sale-leaseback Demand Large institutional investors entering the sale-leaseback market suggests that interest continues to grow, but Swann suggests its impact may be minimal on pricing or deal terms. “It seems at this point that every large asset manager has realized that they need a net lease platform in order to offer a full suite of investments to their clients,” says Swann. When considering the months ahead, Swann acknowledges that continued long-term rate increases may affect future deal flow, but notes that demand from tenants and capital sources has remained strong. “The rise in rates that we’ve seen over the last six months hasn’t really had a major impact so far,” says Swann. He points to one area where capital may be getting ahead of itself, which is the trend of very aggressive pricing for assets leased to investment-grade credits. However, he also notes that because W. P. Carey’s core focus is primarily on sub-investment-grade credits, that trend hasn’t had much of an impact on its business to date. Overall, Swann views market pricing as fair and reasonable. And because recent rate increases haven’t had a major effect, he remains optimistic about deal flow over the next 12 months.
Sale-leasebacks Earn a Bigger Role in Capital Strategies
Corporate operators and private equity sponsors are increasingly using sale-leasebacks in their capital strategies, whether to fund acquisitions, manage costs, or improve their balance sheet position. When companies own significant real estate, this structure provides access to the full property value without disrupting operations, says Zachary Pasanen, managing director and co-head of North American investments at W. P. Carey. "Companies often have significant capital tied up in real estate, so a sale-leaseback allows them to monetize the real estate fully, lock in a very long-term contract, and fix their rent for a sustained period of time," Pasanen says, adding that proceeds are commonly used to shore up balance sheets, fund growth initiatives, pay down expensive debt, or address near-term obligations coming due. As more companies weigh their options for unlocking the value of their real estate, the structure's appeal comes down to how well it fits broader capital goals. Private Equity Sponsors Find Value in the Multiple Gap Private equity firms have become steady users of sale-leasebacks to finance corporate acquisitions, Pasanen notes. This structure provides an opportunity to capture value from the gap between the real estate multiple and the acquisition multiple. "You can often find strong accretion by utilizing the sale-leaseback," Pasanen says. He adds that prudent CFOs and sponsors are factoring it into M&A strategies as an additional way to capitalize acquisitions. Corporate operators are also using this structure for other balance sheet purposes. For example, companies looking to pay down near-term or expensive debt may apply sale-leaseback proceeds while maintaining operational control of their facility. "The way we structure a lease gives them effectively the same controls they had when they owned the facility," Pasanen says. He explains that tenants can make alterations within reason, and they remain responsible for taxes, maintenance and insurance, much as they were before the deal closed. Pasanen also notes that W. P. Carey is a long-term capital partner to its tenants and can support their real estate needs as they evolve, with the ability to finance expansions, renovations or energy retrofits at their leased properties. Capital Flows In as Appetite Stays Strong Companies holding real estate often find the structure attractive because it helps them unlock a property's full market value. Pasanen notes that mortgage financing, by contrast, typically returns around 50 to 70 cents on the dollar. Corporate demand for sale-leasebacks is met by a market with no shortage of capital supporting it. Pasanen expects the sale-leaseback market to remain active, noting that a growing pool of investors are entering the space. For specialized facilities where tenants have invested heavily and relocation is expensive, Pasanen says investor demand remains particularly strong. This suggests the structure will remain a viable option, particularly for companies whose real estate is critical to their operations.
Net Lease Retail Continues To Surge
Net lease retail continues to attract investors seeking stability, long-term income, and defensive retail plays, and market momentum should remain strong into next year, experts say. GlobeSt spoke with Michael Fitzgerald, Head of U.S. Retail Investments for W. P. Carey, at this year's ICSC Las Vegas conference to discuss which retail categories are strongest, why sale-leasebacks continue to dominate the landscape and why he remains bullish on net lease retail. In this video, you'll hear: Which retail categories are the strongest in the current market What's driving the growth of sale-leaseback transactions How the net lease market will perform in 2027 Watch now An interview with Michael Fitzgerald, W. P. Carey, and Holly Amaya, GlobeSt.com.