NNN Investors and Inflation

­  With more positives than negatives, an inflationary interest rate environment can
be positive for real estate investors. As always, the net benefit to a net lease
investor is NNN property specific. Generally, as inflation moves up, so too do
interest rates get tweaked upwards by the Fed to reduce asset prices and consumer
prices in an inflationary environment. This causes a rise in mortgage rates and
thus dampens the overall level of acquisitions activity of NNN properties.

But careful, nnn investors with access to historical debt at low cost continue to
acquire NNN properties, especially those tenanted by medical, auto parts, grocery,
QSR/fast foods, and child care tenants, even as interest rates are rising. Such
investors not only have lower costs of capital, but also realize that their
accumulated debt portfolio (“dry powder”) is a bigger negative for the lender whose
rate of return on the debt is being eroded by inflation!

Asset prices of quality triple net lease properties do not decline as much as they
should because demand does not get affected as much. In other words, NNN
property cap rates remain stable for longer periods of time, than one would think,
even during inflationary environments. For NNN properties with greater risk,
especially speculative properties or properties with uncertain “upside”, the price
decline is greater in periods of inflation. Developers and triple net lease investors
need to be aware that these price declines for riskier NNN projects will be further
offset by escalating costs of labor and materials in an inflationary environment.
Then again, NNN net lease rents are typically tied to consumer prices and rise with
inflation, pushing up property income. Whilst inflation raises construction costs, it
benefits existing NNN investors because they can expect less competition from new
NNN projects in their property’s geography.

Wait, there is more. In today’s inflationary times, triple net leases are still typically
backed by investment-grade lease guarantees by NNN tenants. During periods of
inflation, NNN leases continue to relieve owners of all management and
maintenance, etc. Further, net lease Investors can receive up to 25 years of
passive, income with elevated IRRs because of rent escalations, avoiding the
inflation bite. Lenders remain keen to mortgage triple net properties and often
extend favorable terms to NNN net lease investors versus other types of
commercial real estate. During inflationary periods, NNN triple net lease properties
can still be conveniently bought and sold within 1031 exchanges to build inter-
generational wealth, (For a while it seemed that the Biden Administration was going
to risk a loss of more than $20 billion annually in tax revenue from 1031 exchanges
by limiting the breadth of like-kind tax exchanges of real estate, but that will not
happen at all. IRS Tax code 1031 is off the table for modification.)

Your team of nnn advisors at the Triple Net Investment Group, have successfully
navigated for hundreds of repeat NNN investors through decades of business
cycles, and can offer unique, actionable insights into your net lease investment opportunities today.
Contact one of our nnn brokers today, for a free consultation
at 202-361-3050.

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