QA &
with Brian Krebs
State of Financing:
Single Tenant Net Lease Investments How does financing for Single Tenant Net Lease investments (STNL) vary from the rest of CRE? Financing for single tenant net lease investments varies quite a bit when compared to the other primary product types. When a lender is considering a financing request for a single tenant net leased investment, the lender will first analyze the tenant and location of the property to determine if the request falls within their lending parameters. A big part of the underwriting process is assessing the risk associated with the potential transaction. Assuming the deal falls within their lender’s parameters, they will then price the rate to accommodate for the associated risk, taking both the tenant’s creditworthiness and location into consideration. When you have a single tenant, vacancy is not diversified, therefore, a lender will put more weight on underwriting the tenant as opposed to a multi-tenant asset where the tenant base and overall risk is diversified. Financially stable credit tenants are generally viewed as less risky which leads to favorable lender pricing. Properties with smaller and less financially stable tenants are viewed as a higher risk and more difficult to finance which is reflected in both the pricing and leverage offered by the lender.
Multi-tenant properties typically have a more diverse tenant base, therefore not all tenants present concern to the lender. Underwriting will be focused on the larger tenants in particular the credit, sales and remaining lease term. For example, a retail center with ten tenants, five which are financially strong, the weakness of the other five tenants does not weigh as heavily on the terms in which the lender is comfortable to extend. The financial strength and credit worthiness of the five tenants make up for the risk imposed by the others.
How is this sector performing compared to last year? Overall transaction volume has slightly decreased for the single tenant net lease sector. However, the amount of properties financed has increased year over year. Primary factors behind this are the fact that many short-term loans with terms ranging from three to five years are coming to maturity and need to be refinanced. Additionally, investors are always looking to increase yield and take advantage of historically low interest rates as well as extending the term and security of their investment.
Which property types do you consider the most resilient at this point in the cycle and why? When evaluating which property types will perform in the coming years, we should take a closer look at the overall economy and where each asset class fits in. Properties that service growing industries will outperform those that are servicing declining sectors. For example, with an increase in e-commerce activity, we expect industrial warehouses and distribution centers to perform very well over the coming years. On the other side, you have large big box retailers that will need to redesign the way they do business to remain competitive.
How is Matthews™ Capital Markets helping STNL agents and investors with the challenges seen i n financing for these assets? Our team is very involved with assisting agents who specialize in single tenant net lease investments. From the time book and records are received, to when the property is listed, our team is heavily involved and in many cases, plays an integral role in determining the pricing of the asset. A buyer generally will consider what financing terms are attainable and how that will affect the overall return prior to making an offer. I view our team as much of an investment advisor as a mortgage banker for both sales agents and investors to benefit from.