Net Lease Market Faces Reality Check as Fundamentals Return to Focus

Written by:

Steve Marcinuk

Date:

15 Aug 2025

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The commercial real estate market is experiencing a significant shift as investors and brokers return to fundamental analysis after years of aggressive deal-making. This transition is particularly evident in the net lease sector, where cap rates have been climbing for nine consecutive quarters and inventory shortages are creating new market dynamics.

Ken Jacobsmeyer, Associate Director of Investments at Marcus & Millichap‘s St. Louis office, has witnessed this change firsthand. With nearly two decades in commercial real estate, including eight years in development and property management before transitioning to investment sales, Jacobsmeyer brings a comprehensive perspective to current market conditions.

“We are seeing cap rates rise. There’s such a lack of inventory that we haven’t seen in a few years,” Jacobsmeyer observes. However, this inventory shortage isn’t uniformly positive for the market. Certain property types are experiencing oversupply, particularly Starbucks locations, which have “flooded the market” with more properties available than ever before.

The Starbucks example illustrates broader market pressures. Properties that previously traded at 5.5% to 5.75% cap rates are now coming to market at 6.25% as sellers attempt to move stale inventory. This trend reflects a fundamental shift in investor behavior and market expectations.

Return to Real Estate Fundamentals

Perhaps the most significant change in today’s market is the renewed focus on property fundamentals. The speculative fervor of recent years has given way to detailed due diligence and risk assessment.

“We are seeing big transactions, but they’re cut in half,” Jacobsmeyer notes. “A lot of the conversations we’ve had with clients and prospects focus more on real estate fundamentals, going back to the basics. It’s not the Wild West like it was three or four years ago.”

This shift is evident in investor questions that weren’t commonly asked during the market’s peak. Properties that might have sold quickly based on brand recognition alone now face scrutiny about guarantor strength, corporate versus franchisee ownership, and long-term viability scenarios. The change represents a healthy market correction, according to Jacobsmeyer.

Financing Challenges Reshape Deal Structure

The lending environment has become significantly more restrictive, creating additional hurdles for transactions. Banks are requiring 35% to 40% down payments, reminiscent of the post-2008 financial crisis. “Banks, obviously, if you need debt, there’s a whole new set of hurdles to deal with there. It’s kind of like going back to 2010-2011,” Jacobsmeyer explains. This increased scrutiny extends beyond down payments to comprehensive property and tenant analysis.

The financing constraints are contributing to longer transaction timelines and more selective buyer behavior. Properties that once attracted multiple offers now require more extensive marketing periods and price adjustments.

Construction Costs Create New Market Dynamics

Rising construction costs are fundamentally altering the economics of new development and existing property valuations. This has been pronounced in the quick-service restaurant sector, where new builds demand significantly higher rents. “You’re seeing $4 million Taco Bells in tertiary markets with $230,000 rent or more than $67 per square feet,” Jacobsmeyer observes. “Great tenant, great brand. But if you look at their AUV and rent-to-sales ratio combined with rent bumps throughout the term, it could get a little hairy down the road.”

These elevated construction costs create a two-tier market. Properties built during the low-interest-rate environment (despite having less term) may offer better value than new construction, which carries higher land costs, construction expenses, and resulting rental rates. A property starting at $200,000 annual rent could easily reach $250,000 to $300,000 by years 10-12 with escalations, potentially creating unsustainable rent-to-sales ratios for tenants.

Local Market Success Stories

Despite broader market challenges, Jacobsmeyer has found success in automotive-related properties. His last five transactions have all been in the auto space, with four located in the St. Louis area. These deals shared common traits: non-credit tenants with strong local market presence, local buyers, and all-cash transactions. The success of these deals highlights the importance of local market knowledge and tenant familiarity.

“We knew the business. We knew the tenant. We knew, for the most part, their financials, but they had tons of locations, and we knew they run a good business,” Jacobsmeyer explains. Local expertise eliminated much of the education typically required for out-of-state investors. The transactions also achieved strong cap rates despite involving non-credit tenants, demonstrating that local market dynamics can override broader credit concerns.

The Trillion-Dollar Debt Maturity Challenge

Looking ahead, the commercial real estate market faces a significant challenge with approximately $1 trillion in commercial real estate debt maturing in the coming year. Properties financed at 3% interest rates now face refinancing at 7% or higher.

“Those were, let’s say, 3% interest rates, now it’s 7%. How is that going to affect the market, each market, each developer, everybody, all those investors?” Jacobsmeyer questions.

This debt maturity wall is creating difficult conversations with property owners who may be breaking even on debt service. The prospect of higher financing costs is forcing owners to consider disposition strategies they hadn’t previously contemplated. The situation is particularly challenging for investors who acquired properties at compressed cap rates during the market peak. Properties purchased at 5.5% to 6% cap rates may no longer generate positive cash flow when refinanced at current rates.

Market Outlook and Investment Opportunities

The convergence of these factors suggests significant market changes ahead. Jacobsmeyer anticipates increased inventory as debt maturities force sales, potentially creating opportunities for well-capitalized investors.

“I think you will see a flood of inventory coming, which is probably going to have a negative effect, but good for investors flush with cash,” he predicts.

This dynamic aligns with broader market observations about institutional capital sitting on the sidelines. Many investors are waiting for what they perceive as market bottom, which may coincide with the debt maturity crisis, potentially creating a 2026 scenario where distressed sellers meet patient capital in a more favorable environment.

Adapting to New Market Realities

For real estate professionals and investors, the current environment demands a return to fundamental analysis and patient capital deployment. The speculative excesses of recent years are giving way to more disciplined investment approaches focused on sustainable cash flows and realistic growth projections.

Success in this environment requires deep local market knowledge, understanding of tenant credit quality, and assessment of long-term lease economics. Properties that might have sold on brand recognition now require comprehensive analysis of guarantor strength, market position, and renewal probability.

The net lease market’s evolution reflects broader commercial real estate trends toward more conservative underwriting and realistic pricing. While this transition may reduce transaction volume in the near term, it’s creating a foundation for more sustainable growth and better risk-adjusted returns for patient investors.

As the market navigates these challenges, the emphasis on fundamentals and local expertise positions experienced professionals like Jacobsmeyer to identify opportunities others might overlook, particularly in secondary markets where local knowledge provides competitive advantages.