Q&A with SRS’ Matthew Mousavi on the Q2 Net Lease Market

The second quarter, which began with much of the economy locked down by responses to the COVID-19 pandemic, clearly was a challenging time for investment sales. Yet, net lease properties generally—although not invariably—fared better during this period. Connect Media sounded out Matthew Mousavi, managing principal, SRS National Net Lease Group, on the findings of the firm’s recently issued Q2 report.

Q: The second quarter brought unprecedented circumstances, yet the SRS team got deals done. Comparing net lease to other asset classes (e.g., multi-tenant retail, apartments, etc.), was Q2 deal flow impacted by the pandemic to the same extent?

A: The impacts to net lease are less than what we’re seeing in other asset classes. This reminds us how wide of a market the net lease buyer pool is, and how efficient the market is within net lease. Note non-essential net lease, like gyms and theaters, are in very tough straits and some of the hardest hit categories. By no means are we out of the woods in that regard.

Q: Q2 saw cap rates widen in a few classes of net lease properties (notably pharmacies) and widen in others. Do you expect these pricing trendlines to continue, or is that largely dependent on the speed and strength of the recovery?

A: I do expect some categories to widen in terms of cap rate, but that widening will be counteracted by the low interest rates we expect to continue, the demand for passive income and the amount of capital in the marketplace. We went into this pandemic on very strong footing. The economic crisis brought on by COVID-19 is unlike other downturns – there are specific sectors of the economy that are doing very well, so not all companies and credits are experiencing a downturn. For some, it’s the opposite. Cap rates will reflect these variations in the greater economy.

Note that net lease has not yet seen an influx of bank-owned, distressed / REO type property, or a deterioration of liquidity. Should that occur, then there could be widening cap rates and depressed demand.

Q: In your introduction to the report, you note that investors are reacting out of concern in the short term. What factors, economic or otherwise, will restore investor confidence?

A: The resiliency of the consumer is surprising the markets and many in our industry. We as Americans have been through trying times and came out the other side stronger. As it appears COVID-19 will be with us and there will be continued ups and downs in cases, I don’t see complete shutdowns as the new normal, rather, we will learn to deal with this health crisis and move on with our lives. I think vaccines, better therapeutics and treatment will help restore investor confidence, combined with the realization that we must learn to walk and chew gum at the same time. We cannot shut down the entire economy, nor can we overnight eradicate COVID.

Q: We’ve heard projections that the recovery may be more gradual than a V-shaped scenario. What positions net lease demand to remain strong regardless of how slowly or quickly the economy gets back up to speed?

A: We expect the demand for essential use net lease to remain strong. Lack of overbuilding, low interest rates, strong performance by essential use operators and credits, and the demand for hard assets with passive income will help position net lease demand.

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