Episode Details

As real estate values reset and cap rates widen, net lease is back in focus—but the approach has changed. Ron Kamdem and Hank D’Alessandro explain.

Read more insights from Morgan Stanley.

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Ron Kamdem: Welcome to Thoughts on the Market. I'm Ron Kamdem, Head of U.S. REITs and Commercial Real Estate Research. 

Hank D'Alessandro: And I'm Hank D’Alessandro, Managing Director on Morgan Stanley's Real Estate Investing Team and Vice Chairman of Private Credit. 

Ron Kamdem: Today: a part of real estate that's changing fast and drawing fresh attention from investors. Net lease investing. 

It's Friday, May 8th at 10am in New York. 

You might not think you invest in net leases. But there's a good chance you do, especially if you have money in a pension fund or another income generating vehicle. Net leases are the kinds of long-term lease assets that can help generate steady, predictable income. 

They are no longer a sleepy corner of the real estate market. In fact, they're changing in some really interesting ways. 

Ron Kamdem: So, Hank, for listeners who know the term but may not know the structure, what exactly is net lease investing? And why does it tend to come up more often when markets get more uncertain? 

Hank D'Alessandro:   At a high level, net lease investing is typically associated with long-term leases that can offer durable income streams; typically growing streams, which is why it's often seen as a more defensive part of real estate investing. We see that when investors are thinking more carefully about geopolitical risks, market volatility or say portfolio resilience, this durable cash flow derived from mission critical assets and long lease durations with fixed annual rent bumps can become especially attractive to investors. 

Also, with higher inflation likely, net leases are generally insulated from increases in expenses given these are the responsibility of tenants. But what's important today is the net lease is broader than many people realize, both in terms of the property types involved and the range of investors participating in the space. 

Ron Kamdem:   Let's stay on that idea of a broader market for a moment, because one of the biggest shifts has been the growing role of private capital in the space. What are you seeing there and why does it matter? 

Hank D'Alessandro: Well, listen, Ron, there's no question. The role of private capital has grown substantially, including through joint ventures and public real estate vehicles. That matters because it tells you that the sector is attracting a wider range of investors than it has in the past, such as pension funds, insurance companies, sovereign wealth funds. And retail investors are increasingly investing either through traditional locked up funds or through semi-liquid funds. But it can also change the competitive landscape and can influence how capital gets allocated across the opportunity set. 

Thus, one's approach going forward from an analysis perspective will need to evolve. More broadly, it's a sign that net lease is being viewed as highly relevant in today's market, not just as a legacy category within real estate. 

Ron Kamdem: And that's an important distinction that you make right there, because not all investors are approaching these assets the same way. So, when private capital comes into the space, what separates their underwriting approach from another? And we hear all the time about private credit. How does that play into this? 

Hank D'Alessandro: Well, Ron, you know, as we discussed previously, the competitive landscape is changing and ther