Net Lease Real Estate

Pairing bond-like income with real estate upside, net lease real estate models are an under-appreciated investment thesis.

Thesis Driven dives deep into emerging themes and real estate operating models. Today’s letter is from guest contributor Jonathan Andrews, a real estate developer and investor with Arch Companies. It digs into net lease real estate models with a focus on the automotive subsector.

The automotive sector is a great case study for net lease real estate models, which we’ll feature in this letter.

Commercial real estate is at an inflection point, undergoing one of the largest shifts in the way we occupy the built environment in the past 50 years. In the face of today’s changing demands for space and evolving consumer preferences, what real estate sectors are slated to emerge as likely winners in the coming decade? Asking ourselves the “10-Year Question” prompts a very simple two-part query: in ten years, what will the world look like? And what are the asset classes, subsectors, and products which will outperform in that world?

Specifically, certain segments of real estate beyond the “four food groups”of office, industrial, retail, and multifamily have seen a greater preservation of value than others. Key winners in this space are generally included in the broad category of “real estate alternatives” and other specialty asset classes¹. Today’s letter will focus on net lease real estate, an oft-overlooked alternative real estate sector.

For those not as familiar with the category, net lease offers investors several benefits in today’s inflationary and high interest rate environment. Yet not all net lease is created equal, as the definition includes both victims of the pandemic (such as office buildings and movie theaters) as well as clear winners (such as QSRs and industrial properties). This letter will offer an overview of the net lease category before diving into a lesser-known but strong net lease performer: automotive real estate.