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January 19, 2018

Despite strong fundamentals in the real estate investment markets, and specifically within the net lease sector, retail net lease buyers are focusing their efforts on mitigating risks.

So, what are they looking for? According to JLL’s James Cook from the firm’s Americas Retail Research team, it’s “long-term leases, creditworthy tenants and high-quality locations.”

But, finding these opportunities is proving increasingly challenging. As investors become more selective and continue to diversify their portfolios, any retail net lease opportunities that don’t hold these credential risk limiting their buyer pools.  And, while over US$300 billion of net lease product has traded over the past decade and sales volumes remain stable, Cook says  that the number of deals has started to level off.

“Many companies are making sure to create a robust retail platform for themselves as opposed to maintaining numerous properties all over the country and waiting for some to inevitably underperform,” he explains.

This, he says, is in contrast to investor behaviour across other net lease sectors, which demonstrates more flexibility in risk requirements in return for accretive yields.

Yet, despite the challenges, retail net lease investors are starting to adapt and adopt more creative investment strategies, according to Blake Lacher, from JLL’s Capital Markets team, pointing to the opportunities in consumer durable-tenanted retail assets as well as assets with below-market rents or lease structures that feature long termination options. “High fees also help provide ample time for the landlord to re-tenant or adaptively reuse,” he said.

As the market looks ahead and tries to forecast where we sit in this extended cycle, consistent sales and a healthy pipeline with a growing buyer pool are expected to carry the sector through a strong 12 to 18 months. “This will  given net lease’s bond-like returns and favorable long-term fundamentals,” says Lacher, who believes that, “pending no major economic changes, optimism remains the norm.”

Adapted from an interview with Shopping Center Business, January issue.

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Blake Lacher

Managing Director, JLL Capital Markets

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