Commercial real estate investors continue to face challenges. For example, rising interest rates and the possibility of a recession have significantly impacted the investment market. In addition, with a drop in liquidity, there have been fewer buying or selling opportunities. Plus, investors who do happen upon worthwhile deals will experience financing issues as lenders become more cautious. So let’s explore some methods to obtain financing for a net lease within this challenging industry.
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Net Lease Properties Are More Stable
The current economic conditions impact net lease investment properties less. That is because they have always had stability in times of uncertainty. In addition, this is particularly true with net lease properties with credit-worthy tenants under long-term leases.
These types of commercial properties are far better investment opportunities than multi-tenant properties. Part of this is because multi-tenant properties have experienced a trend of vacancies when the economy takes a downward slide. Also, this was the case during the pandemic when layoffs, job loss, outsourcing, or change of venue to work at home occurred. Another benefit of net lease properties is removing much of the risk owners usually carry. Triple net lease tenants have many responsibilities ranging from utility to maintenance costs which remove inflationary pressure from the building owner.
However, many factors determine an investor’s success in entering the net lease environment. They include the following:
The Reality of Location, Location, Location
You have likely heard the significance of location many times. It is vitally important to weigh the location of a net lease property if an investor expects a lender to get involved. However, evaluating a commercial building’s location is much more complicated than where it sits on a map.
In addition, ease of access is essential. Properties that sit at a corner with a stop light are most desirable. Consider the site and determine if it is highly desirable if they have a straightforward entrance into the parking lot and can easily exit. Net lease properties that are set back from a major traffic route or require crossing a busy highway are less popular than investments.
The Type of Retail Counts
While dollar stores are popular and generate a fair deal of traffic, healthcare properties are where investors believe in the most stable retail businesses. In addition, these real estate locations typically contain tenants reluctant to relocate once established in one area. These tenants do a great deal of research long before they open for business to ensure they are near patients, hospitals, or other healthcare-related facilities.
Also, healthcare-related retail businesses require specific licensing. For example, requirements for some forms of licensing are proximity to particular demographics. In addition, some of these healthcare facilities provide elective or cosmetic procedures without the impact of economic conditions.
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Past History In The Net Lease Market
Although net lease assets are generally a wise, solid investment, they could be more foolproof. For example, when shopping for a loan, you may quickly discover that the length of your experience with this type of investment will directly impact your ability to secure a loan. In other words, if you have a successful track record, you will find it less challenging to get a loan.
However, expect some opposition or necessary extra steps. For example, you might need to obtain a co-signer or need a larger down payment if you are a newcomer to the net lease sector. In addition, you may need to turn to equity partners that have either worked successfully with lenders or can put together an all-cash deal.
Keep Your Expectations In Check
Because the market is facing challenges, it is crucial for investors also to slow down and maintain realistic expectations. Refrain from letting the speed with which net lease properties are trading fool you. The bid-ask spreads could widen as a result of increasing cap rates. Therefore, when this happens, buyers must be patient to avoid overpaying for an asset. The waiting game is much easier for well-capitalized investors, which makes sense. They can afford to wait things out and often do. They buy low and sell high, making a good profit.
Net lease assets are still attractive even if buyers squeeze through extra doors to seal the deal. That is because, in the view of most lenders, they are easy to finance and present a solid, long-term, stable opportunity. However, newbies will have a more challenging time getting into the net lease sector, but it is possible. It just takes a lot more research and innovative financing options if a lender turns an investor down based on a lack of experience. The bottom line is that net lease opportunities are profitable for both buyer and lender when done correctly.