Net Lease Property Investments Demonstrating Remarkable Growth in 2022

By  //  May 1, 2022

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In the past year, Net Lease Real Estate Investment Trusts (REITs) have exchanged more than the median REIT, even despite a high rate of inflation and the persistently growing interest rates. Should inflation levels reduce even slightly from their present position, net lease REITs would be pushed to outperform again.

Investors are being drawn to these assets because they are beginning to acknowledge them as an incredible means to secure a high level of income with minimal upkeep. As if to illustrate this, real estate that was net leased has witnessed billions of dollars worth of investment pouring into the asset from all angles, inundating the relatively scarce supply.

What Is a Net Lease?

So what exactly is a net lease, and why should you be interested? A net lease describes a situation in which a lessee has signed a contract to compensate a property’s taxes, costs of maintenance and insurance (in part or in full) on top of the rent they have already agreed to.

The quintessential example of a net lease is when a tenant is required to reimburse all expenses surrounding a real estate – tantamount to how the actual owner would have to otherwise. The term is an antonym of a gross lease, which describes a situation in which the tenant must only cover the cost of their rent, and the landlord must bear all others.

Some of the costs a tenant would be expected to be responsible for under a net lease could include anywhere between some to all of the following: repairs, insurance, utilities and taxes associated with the property. It is common for a lower rate of rent to be offered alongside net leases in order to make it feasible for tenants to pay for them.

A lot of investors in the commercial real estate space are attracted to net leases, particularly among those who purchase real estate for the income alone – who are not interested in the hassle otherwise associated with being a landlord. By engaging with a tenant by means of a net lease, property owners can avoid the headache of repair fees, insurance costs or taxes by delegating these responsibilities to the tenant.

Net Lease Resurgence

Many markets have seen growth on the back of the COVID-19 pandemic. If any of these are to be considered competitive, the net lease real estate market blows them out of the water. Investors have witnessed several billion dollars pour into net lease real estate investment trusts.

Furthermore, the investment activity surrounding REITs exploded in 2021, and has only been continuing on this trend in 2022 as well. Buyers through 1031 exchanges have been in a mad scramble to trade these properties as a result of the nearing threat of these exchanges being repealed. Furthermore, demand for net lease REITs is at an all-time high.

Research by a net lease brokerage, The Boulder Group, has revealed that the quantity of available real estate assets exhibiting tenant leases extending over long periods of time was extremely limited. Moreover, only 22% of properties in the 2nd ¼ of 2021 were associated with a lease with a remaining term exceeding 15 years.

Pursuant to this, these assets have exhibited declining cap rates, which imply rising prices for this stream of income, in the market at the moment. Demand for these valuable, low-maintenance assets outweighs the supply by far, which has created an environment conducive to a highly competitive market for these assets.

A small number of net lease investors, in a hunt for additional returns, have even decided to prioritize leases that are shorter in length because of the demand (and lack of demand) associated with longer term ones. This increase in demand for net leases of all lengths has resulted in a substantial increase in liquidity for more risky assets.

Final Thoughts

Net lease real estate investment trusts represent a great opportunity for investors to generate a relatively hassle-free income stream with little responsibility associated with it. While these contracts often come with lower returns than normal tenancy contracts, this is the tradeoff for the ability to delegate all responsibility to the tenant.

For more information about nnn properties, please feel free to refer to Net Lease World’s website.