The commercial real estate industry is currently facing significant challenges due to a sudden increase in interest rates. Many properties, including multi-family buildings, have experienced a decrease in value, with some of the best programs being written down by 20-30%. This has led to unexpected headwinds for property owners, especially those looking to refinance empty buildings. The situation is further exacerbated by a global office vacancy rate of 12.9% at the end of March, a level not seen since the aftermath of the global financial crisis in 2009 and 2010.
Despite the economic uncertainties, there are still safe investment options available in the real estate market. One such option is long-term net lease investments in essential retail companies with top-quality tenants and top-performing stores. Net lease agreements require tenants to cover property expenses in addition to rent, making it a safer investment choice by reducing the variables and costs associated with property ownership. Essential retail businesses, such as grocery stores and pharmacies, have shown resilience and stability, making them a safe bet for investors.
When considering net lease investments, it is crucial to focus on essential retail tenants, top-quality tenants who can absorb additional costs without financial strain, and top-performing store locations in geographically advantageous areas. By diversifying investments across a portfolio of net-lease properties, investors can mitigate risks associated with owning a single property. Structured as a DST or a private REIT, these investments offer liquidity locked up for a specified period, shielding investors from stock market exposure.
While net lease investments offer stability and a reliable income stream, the growth potential may be limited due to long-term lease agreements with modest rent bumps. However, in the current economic climate of volatility and uncertainty, the security and predictability of net lease investments make them an attractive option for risk-averse investors. The net-lease structure shifts the burden of property expenses to tenants, reducing the owner’s financial risks and ensuring a steady income flow for the duration of the lease agreement.
Frederick Hubler, the CEO of Creative Capital Wealth Management Group, recommends net lease investments as a viable strategy for navigating the current challenges in the commercial real estate market. By focusing on essential retail properties with top-quality tenants and top-performing locations, investors can secure a stable and reliable income stream while minimizing risks associated with ownership. While economic factors such as inflation, interest rates, and insurance costs continue to impact the real estate market, net lease investments offer a sheltered haven for investors seeking long-term stability and security.
