How Interest Rates Move Net Lease Values

Net lease is the most bond-like corner of real estate, so rates are its weather system. The transmission mechanics, and what each regime rewards.

The spread machine

NNN cap rates price off the 10-year treasury plus a risk spread (historically ~150-300 bps by quality). When treasuries move, caps follow — with a famous lag: sellers anchor to yesterday’s comps, buyers to today’s debt, and volume stalls until someone blinks. 2022-24 ran the full demonstration: a 400-bp policy shock, a year of bid-ask standoff, then repricing that arrived deal by deal rather than all at once. The lag is tradable in both directions if you’re watching spreads instead of headlines.

The leverage arithmetic

Positive leverage needs cap rate above debt cost; the spread between them is your levered margin. At 2021’s 4-caps against 3.5% debt, leverage barely paid; at repriced 6s against 6.5% debt it still barely pays — which is why current-cycle buyers skew cash-heavy and treat escalations as the return driver leverage used to be. The regime dictates the capital stack more than preference does.

Duration inside the lease

Flat 15-year paper is long duration — maximal rate sensitivity; annual-bump leases self-hedge, repricing their income steadily. Same tenant, same term, different rate exposure: in any rising or uncertain regime, escalation structure belongs beside credit in the underwriting hierarchy. (The trends note tracks where pricing currently sits — VERIFY quarterly.)

Positioning by regime

Falling rates: duration wins — lock long flat leases and ride compression. Rising: shorten duration (bumps, shorter holds), keep leverage light, and hunt the seller-capitulation windows. Sideways-and-uncertain (most of the time): buy the deals whose math works at today’s numbers and treat any rate luck as dessert. Rate forecasting is a losing hobby; rate positioning is just structure selection, available on every deal.