Net Lease Investments: Stability in Uncertain Times

Net lease properties leased to tenants with investment grade credit ratings appeal to investors who want predictable income with limited management. This guide explains how these investments work, what current market data shows, and the benefits and risks to weigh. For the rating scale, see the investment grade guide.

Understanding Investment Grade Net Lease Properties

An investment grade tenant is one whose debt is rated BBB‑ or higher by S&P Global Ratings or Fitch, or Baa3 or higher by Moody’s. Higher ratings have historically gone with lower default rates: in S&P Global Ratings’ 1981 to 2024 global corporate study, the average five-year cumulative default rate was 0.77% for issuers rated investment grade, compared with 13.64% for speculative grade issuers. Ratings measure the risk of the rated entity, so confirm which company actually signs or guarantees the lease.

In a net lease, the tenant pays some or all property expenses in addition to rent. Definitions vary by market and lease, but generally:

• Single net (N): the tenant pays property taxes.
• Double net (NN): the tenant pays taxes and insurance; the landlord often keeps roof and structure.
• Triple net (NNN): the tenant pays taxes, insurance and maintenance.
• Absolute net: the tenant also bears roof, structure and capital replacement.

Triple net describes how expenses are allocated, not the size of the investment: it can apply to a single property or to a portfolio, and to single-tenant or multi-tenant buildings. Always read the lease to see which costs remain with the landlord.

Current Market Data

These figures update automatically from our listing data and public market sources:

Asking cap rates are not closed-sale cap rates. Cap rates for individual tenants vary widely with credit, lease term and location; see NNN cap rates by tenant and the tenant ratings database.

Benefits

• Predictable income: rent and increases are set in the lease for its full term, so income can be forecast years ahead, subject to the tenant paying.
• Limited management: under a triple net or absolute net lease, the tenant pays most operating costs and handles most maintenance.
• Tax planning: owners can depreciate the building and defer gain on a sale with a 1031 exchange. Ground lease owners usually have little depreciation because they own only land.
• Partial inflation protection: most net leases have fixed rent increases, such as 10% every five years or 1% to 2% a year. These provide growth but can lag when inflation is high; few net leases are tied directly to inflation.

Risks and Drawbacks

• Limited upside: long fixed leases cannot be marked up when market rents rise.
• Tenant failure or departure: if the tenant defaults or leaves at lease end, the owner carries the whole property until it is re-leased, often with costs for improvements, leasing commissions and downtime, while still paying any loan.
• Interest rate sensitivity: long fixed income streams lose value when interest rates rise, which pushes cap rates up and prices down.
• Credit changes: ratings can fall during a lease. Well-known tenants have been downgraded or filed for bankruptcy during long lease terms.
• Concentration: one property usually means one tenant and one location.

How to Evaluate a Property

• Tenant and guarantor: check the rating of the entity that signs or guarantees the lease, its trend, and the health of its industry. Necessity-based businesses have tended to hold up better in downturns, but each company differs.
• Real estate: judge the location, building and rent as if the tenant might leave. Rent near or below market rent makes re-leasing easier.
• Lease term and structure: remaining term, renewal options, rent increases, and which expenses the landlord keeps. Longer terms with strong tenants usually trade at lower cap rates.
• Diversification: spread exposure across tenants, industries and regions, whether by owning several properties or combining direct ownership with other investments.

Frequently Asked Questions