Private Cash Buyers Dominate Net Lease

Article originally posted on Globe St. on March 29, 2024

Are you a net lease investor with $5 million cash in your pocket? Then you’re golden in the current market.

Right now the sector’s biggest problem is that there is a considerable amount of supply on the market and not enough buyers willing to invest at cap rates where the merchant developers can break even or make some money, explains Jimmy Goodman, partner with The Boulder Group. Goodman will be a moderator at GlobeSt.com’s upcoming Net Lease conference.

Most of the deals he is seeing come from private buyers because institutional capital needs to be at a much higher cap rate – over 7% – compared to what private buyers can do. “There are not enough sellers that can meet that high of a cap rate,” Goodman says. A private buyer with cash, though, does not have to secure expensive financing, which is why the sub $5 million deal space right now is particularly robust. “The larger the deal the more likely you will need some form of debt and that makes a deal harder to pencil, Goodman says.

The situation could not have been more different two years ago before the onset of inflation and the sudden rise in interest rates. Like the rest of commercial real estate, transactions plunged last year and firms like The Boulder Group scrambled to navigate this new environment.

“We are doing okay,” Goodman says. “We are having success finding buyers and getting deals closed. I think that is a testament to the fact that we are a boutique shop. We can be nimble and creative and selective about our transactions.”

He sees 2024 unfolding much like 2023 did, unless there is a change in the interest rate environment. The Fed has alluded to rate cuts which creates optimism but until that happens not much can or will change, he says. “Once there is a formal cut hopefully that will open the bank market and bring out the 1031 buyers.”

In the meantime, he doesn’t expect to see much opportunistic buying in this category. “There won’t be any distress in net lease – these assets aren’t that big in size and banks have bigger problem assets to deal with.”

Also, net lease is so easy to understand that the bank can kick the can further down the road if a loan is in trouble, he continued. “The tenants are typically performing and the properties aren’t vacant as they are in office.  The bank likes that.”