Investor demand for U.S. net-lease product remains strong, with 2016 transaction volume the second-highest annual amount in the past 15 years. Net-lease transactions are also increasing as a share of total annual investment.
Despite rising 10-year Treasury rates and marginal softening in net-lease cap rates, spreads remain in line with long-term averages, ranging between 300 and 400 basis points (bps). With further increases in long-term rates expected, spreads are likely to be under pressure. Furthermore, investors are likely to become more selective on asset type, lease terms and credit quality.
Lender appetite, rising interest rates and questions regarding proposed tax reforms present headwinds for the net-lease segment. However, the overall outlook is cautiously optimistic, particularly given the considerable equity chasing yield-driven real estate in the U.S.
Net-lease retail is the strongest performing net-lease asset type. Drugstores and casual-dining properties represent about half of total transaction volume, fueled by favorable consumer trends and opportunities for sale-leasebacks.