What to Watch for in Net Leasing This Year

Even though we’re well into 2019, the very nature of commercial property investment means that it’s never too late in the year to begin diversifying your investment portfolio with one of the highest income streams available.

If you’ve already worked in the residential property sphere, you may feel familiar with the ins and outs of property purchasing, maintenance, and leasing. However, unlike residential properties, commercial properties offer you a consistent source of income due to longer leases, as well as the opportunity to save money by implementing a net lease with your tenant.

Here’s an overview of net leasing as well as a forecast for what you can expect in net lease trends for this year. 

Net leases

When leasing a single-tenant property, net leases provide you (as the property owner) with a money saving alternative to the more traditional full service or modified gross leases used by multi-tenant buildings.

Gross lease: A gross lease is the most common type of lease for commercial buildings that rent to multiple tenants. In the case of these kinds of leases, tenants play a predetermined amount of rent and landlords cover the cost of property taxes, insurance, and maintenance. 

Single net lease: In a single net lease, tenants cover the cost of rent as well as one of the three aforementioned costs (property taxes, insurance, etc). 

Double net lease: A double net lease requires a tenant to pay their rent as well as the taxes and property insurance. 

Triple net lease: Triple net properties, or NNN properties, are the best option for property owners. The lease on this kind of property puts the responsibility of all three of these costs on the tenant, saving the landlord money and relieving them of a bit of the burden of owning a rental property.

Owners of NNN properties have a more predictable, steady income since they won’t have to deal with the unpredictability of taxes and maintenance costs. When property owners don’t have to worry about these unpredicted costs, they can rest easy knowing exactly how much money they’ll be making from their property.

New entrants in the market

This year, more and more private buyers will be entering the net-lease sector as the markets continue to be variable and dependent on diplomacy and tariffs. Independent investors who want to diversify and protect their assets will be seriously considering commercial property investments. Watch for these buyers as they’ll be aggressive in their pricing and competitive. 

Availability vs. demand

Generally, there has not been an increase in newly developed properties being made available to new purchasers. Instead, new supply of properties this year has come from older properties with shorter term leases (think office spaces) and retail properties. 

Retail is making a come back: Overall cap rates have increased over the last year or two, but specific kinds of properties have maintained their popularity. The last year has seen an increase in the supply of retail net lease properties. Simultaneously, demand for retail properties has continued to rise, meaning that the best property to consider purchasing as this time would be a single tenant, net-lease property.

This kind of property could serve as a gas or convenience store, a quick-service restaurant, grocery store, or even for a medically-related franchise location. When purchasing a property, consider an “internet-proof” type of business. This of course includes everything listed above, as well as coffee shops, auto service, and specialty boutiques. 

Healthcare and distribution properties: Medical offices/healthcare franchises and shipping properties will continue to be in high demand this year in addition to retail spaces.

Distribution and mailing store fronts are increasing in demand due to the growth of the e-commerce sector. As e-commerce continues to grow, so does the need for distribution centers and store-fronts for shipping businesses. 

This is a prime time to invest in commercial, net-lease properties. If you’re new to the business, pay attention to this year’s trends, start with an internet-proof retail property, offer your tenants a triple net lease.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.