NVC News – Retail Investment’s Lonely Bright Spot: Triple-Net Assets
By Connor Hoagland, Associate – National Valuation Consultants, Inc.
Colorado Real Estate Journal – October 7, 2020
Retail has it tough. In the commercial real estate investment world, retail has been the industry pariah ever since the big, bad online retail phenomenon moved to the block. And then, as if retail investment could get much worse, COVID-19 happened. Mandated stay-at-home orders, business closures, and a general hysteria of close personal contact has affected the retail sector for the foreseeable future. With high volatility in the marketplace, investors are looking for safe, durable investments. Don’t look now, but could the safe haven for investors actually be hiding out within the withering retail segment? Single-tenant triple-net assets historically have been a mainstay for investors looking for steady income and mitigated risk. Now might be the perfect time for triple-net retail to shine.
Following a robust year of transaction activity for triple-net assets in 2019, in the first quarter of 2020, transactions of single tenant net leased assets decreased by approximately 9% year over year to $10.7 billion for deals larger than $5 million, according to JLL research. “The shutdown paused investment by making it difficult to perform due diligence, appraisals and other tasks required to close transactions,” says Jon Ferber, analyst, capital markets, JLL. Now that the market has begun to open back up, investors have started to look for alternate investment opportunities that provide long-term, predictable income streams with strong credit tenants.
“Single-tenant, triple-net-lease properties are seeing more inquiries because of their historic stability and resilience in turbulent times”, says Mark West, senior managing director, capital markets, JLL. West said retail assets occupied by essential businesses, such as daily needs providers like pharmacies and food services, are of particular interest to investors. “It has become very apparent in times like these that essential businesses have to remain open for people to survive,” West said. “It’s even more of a reason why investing in these assets makes sense today.”
According to the Boulder Group’s Second Quarter Net Lease Market Report, net-leased assets have bifurcated into to two asset classes; essential and non-essential businesses. As expected, investor interest has been largely focused on essential businesses that were open and operational throughout the pandemic such as pharmacies, quick-service restaurants, grocery stores, convenience stores and dollar stores. High-credit tenants such as Walgreens, CVS, Dollar General, Family Dollar and 7-Eleven are among some of most coveted tenants for investors during this flight-to-quality movement. The report goes on to note that capitalization rates for net-leased retail assets have increased quarter over quarter by approximately 10 basis points to 6.25%; however, capitalization rates for assets occupied by essential businesses, particularly those of the high-credit nature have compressed by approximately 8 basis points due to strong investor demand.
According to a Marcus & Millichap investment sales broker, focusing primarily on single-tenant triple-net assets, investment in assets occupied by essential businesses will be a trend moving forward. “I think people will continue picking up essential goods at these locations, bumping up the sales numbers and making these locations more desirable for investors,” the broker said. “In the long term, tenants such as Walgreens or Dollar General that have shown success during this economic downturn will stick out to investors.”
Everywhere you turn the signs of failing retail are evident. It is no wonder that commercial real estate investors are keeping their distance. But don’t forget about this lonely bright spot in the retail universe. Triple-net retail has long served as a sanctuary for national investors even prior to the broader sector’s recent demise. And now, more than ever, it is poised to continue carrying the torch. In turbulent times such as these where there are so many negatives, it is “essential” that we recognize the positives…one pharmacy, corner store and fast-food restaurant at a time.
