Strategies for investing in net lease assets in a high interest rate environment
Making money by investing in net lease assets in our current high-interest-rate environment requires careful consideration of various factors and the implementation of strategic approaches. Borrowers in today’s market tend to focus on protecting the downside and acting with a “flight to safety” and “flight to quality” mindset. Lenders are no different. Here are some key strategies to consider to increase your probability of securing the most attractive financing in a challenging lending landscape:
Focus on Essential Businesses:
Invest in net lease assets leased to essential businesses that are less sensitive to economic downturns, such as grocers, dialysis centers, dollar stores and pharmacies. These businesses tend to maintain stability and continue operations even in challenging economic conditions.
Select Strong Credit Tenants:
Lenders have much more interest in strong credit tenants and your chances of favorable lending terms are much higher for strong credit tenant assets. Choose tenants with strong creditworthiness and stable financials. This minimizes the risk of tenant default, providing a consistent income stream even in a challenging economic environment.
Seek or Negotiate Favorable Lease Terms:
Seek or negotiate for favorable lease terms, including longer lease durations and tenant responsibilities for operating costs, property taxes, and insurance. Longer leases provide stability, while tenant responsibilities reduce the landlord's operational burden.
Pay Attention to Rent Escalations:
Rent escalation clauses tied to factors such as Fixed Increase Percentages, Operating Cost Pass Through (i.e. NNN), CPI, and Market Rent are critical. Pay close attention to the rent escalators in the lease to make sure you are keeping pace with inflation and market conditions.
It's important to note that any investment involves risks, identifying and mitigating your risks upfront can help your balance of desired risk and return. The success of net lease asset investments depends on various factors, including market conditions and the specific attributes of the individual assets. Conduct thorough due diligence, seek professional advice, and continuously monitor and adapt your strategy based on market dynamics and economic changes.
