Ken Jacobsmeyer, Associate Director of Investments at Marcus & Millichap, has observed a dramatic shift in how net lease properties are being evaluated and purchased compared to recent years. Gone are the days of quick deals with minimal scrutiny, he argues, as investors return to core real estate principles.
“It’s not the Wild West like it was three-four years ago, where there’s a McDonald’s or Popeyes in the middle of nowhere in some tertiary market,” Jacobsmeyer says. “Now it’s, ‘Well, who’s the guarantor? Is it a franchisee? Is it corporate?'”
This heightened focus on fundamentals comes as cap rates continue their upward trajectory. According to Jacobsmeyer, even traditionally stable assets like Starbucks locations are seeing significant cap rate expansion. “There’s more Starbucks on the market today than there were ever, so you’re starting to see those go from five and a half to five and three quarters to six. Now they’re coming out six and a quarter,” he notes.
While national credit tenant deals have slowed, Jacobsmeyer points to success with locally-known operators, particularly in the automotive sector. “The last five deals in a row I’ve done have all been auto-related properties,” he says, noting these transactions closed at strong cap rates despite being non-credit tenants.
The key difference? Local market knowledge and buyer familiarity with the operators. “We knew the business. We knew the tenant, we knew for the most part their financials,” Jacobsmeyer explains. “They had tons of locations, and we knew they run a good business.”
Transaction timelines have extended significantly, according to Jacobsmeyer, with debt financing becoming particularly challenging. “Banks are requiring 35 to 40% down on some of these deals now,” he says, comparing current conditions to 2010-2011.
The scrutiny extends beyond just financing. “A lot of the conversations we’ve had with clients and prospects is more of the real estate fundamentals,” Jacobsmeyer notes. Investors are asking deeper questions about property viability beyond the current tenant and lease term.
Jacobsmeyer suggests this return to fundamentals isn’t likely to reverse soon, especially given broader market uncertainties. The focus on detailed due diligence and strong real estate fundamentals appears to be the new normal in net lease investment.
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