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Strong Demand Bolsters Net Lease Market

May 07, 2019

Growing demand for single-tenant net leased retail assets has propelled the sector to a strong start in 2019. With sellers bringing down pricing to market and buyers implementing more aggressive investment strategies, the expectation gap is beginning to close. Additional demand is underpinned by moderating economic growth, encouraging some investors to use single-tenant assets as a defense play. Though supply is beginning to ebb, most investors are still finding quality options, particularly among older, legacy properties as new construction remains tempered. Buyers will continue to take advantage of debt availability to secure these assets, attracting an array of lenders for properties with good locations, favorable lease terms and high-credit tenants.

Volatility in the broader market has begun to seep into the underwriting environment, with lenders more cautious and conservative than in previous years. Active lenders include local, regional and national banks and insurance companies, with sentiment driven by the high-profile decline of big-box retail. As a result, lending on tertiary assets and locations remains tight, while net leased assets and premier mixed-use structures are highly desired by lenders. This has created a two-tier market structure, with loan-to-value (LTV) ratios in the 55 to 75 percent range depending on borrower, asset and location factors. Mezzanine and bridge loan structures have been more frequently used in this environment, with owners undertaking capital improvements at higher leverage ratios using short-term debt before refinancing upon completion.

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