What the Latest Rate Cuts Mean for the Net Lease Sector
As the Fed cuts rates, investors are re-evaluating their strategies. Here’s what it means for the net lease sector.
The persistent high cost of capital, along with the fact that large amounts of corporate debt are set to mature, have been ongoing challenges for investors. The Fed’s recent rate cut – the first in over four years – leaves many speculating how investors will fare.
“Impacts from these changes will take some time to see,” says Zachary Pasanen, managing director, investments, at W. P. Carey. “I don’t necessarily believe we’ll experience a rush of investment overnight. Everyone is still in the process of figuring out what the environment will look like, and there are also geopolitical situations at play.”
Cap Rates and Market Sentiment
Pasanen suggests a positive outlook for the net lease sector, noting that while volumes are down compared to the previous year, the sector’s resilience remains.
He explains that net lease investments function similarly to bond instruments, and with rates being cut, he doesn’t believe the risk profile changes that dramatically.
“I think the risk paradigm is still very much in that 7%-8% cap range,” says Pasanen, noting that while conditions may eventually spur more net lease activity, it won’t take place immediately.
He also cautions that investors should not get too caught up in “rate cut mania” and risk comprising spread. Focusing on fundamentals and maintaining a disciplined investment approach remain as important as ever.
Relaxed Interest Rates and the Financing Landscape
Funding business growth and quickly accessing capital have left many corporates looking for alternatives to traditional financing. With the Fed’s recent rate cut, Pasanen believes that sale-leasebacks will continue to be an attractive option. He further notes that while there have been pockets of “stress” in the market, these aren’t the same as “distress.”
“Many lenders were willing to accommodate borrowers and work with them,” says Pasanen. “This group made it through this past year and is saying, ‘Okay, I’ve extended the maturity of my debt and identified some dislocation among acquisition targets, and now might be a good time to raise capital and grow my business.’”
However, as these businesses return to banks to raise more capital, financial institutions may have reached a limit in how much they can help, a scenario where sale-leasebacks can be beneficial.
“W. P. Carey has been in business for over 50 years,” says Pasanen. “We’ve been through numerous market cycles and have a lot of capital to deploy. As the market recalibrates, we’ll continue to do what we do best – work with corporate owners to unlock the value of their real estate through sale-leasebacks.”
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