Overlooked Net Lease Categories That Are Still Doing Well

Essential needs providers for net lease retail continue to be in demand for investors seeking a stable, cash-flowing, and long-term investment. As we are all aware, grocery stores, drug stores, and quick service restaurants are winners for landlords and buyers for obvious reasons—people need to eat, obtain their medications, and purchase other conveniences as offered in the drug store space.

Because these three categories are very hot, a larger than usual buyer pool has emerged for these well-performing assets when they come to market. The good news is, these are not the only favorable investments in today’s environment. There are other net lease winners that are performing well, and some are even seeing stronger consumer activity than they were pre-crisis.

Here are a few examples of net lease tenant categories I have observed as winners over the past couple of months—something investors can consider adding to their portfolio mix:

Office supply stores: Retailers such as Office Depot and Staples had been relatively flat in terms of sales in the months prior to COVID, and many had right-sized to their benefit over the past few years. Today, however, they have been performing at higher levels due to both the work from home mandate and the need for students to undertake distance learning. Printers, desks, computers, and mailing supplies, among other items that are needed to replicate work and school environments at home, have driven this demand. Additionally, with an immediate need, the stores are quicker and easier to access as opposed to online delivery platforms, such as Amazon, who are overloaded with orders and are focused on prioritizing essential deliveries that don’t typically include office supplies.

Will this trend continue to have legs? We can’t predict that now, but if people decide to work at home and kids choose distance learning for the longer-term, it will likely be a win for the office supply stores.

Pet stores: These assets are performing well as they are essential for those who care for their animals. With more time on their hands in many cases, pet owners are making more trips to the brick and mortar stores to care for and attend to their pets.

Dialysis and urgent care facilities: People still have a consistent need for these types of medical locations, which are oftentimes located as an outparcel to a retail center. As numerous hospitals are recommending people utilize these as an alternative, and as others opt to use them in order to avoid the hospital environment for various reasons related to the COVID pandemic, dialysis and urgent care facilities are seeing an increase in traffic.

We will unfortunately see a number of retailers shutter their doors due to the pandemic. The good news is, both likely and unlikely winners in this diverse and evolving property sector will emerge. Our team continues to keep a keen eye on what is transpiring in the industry in order to advise our clients on creative investment strategies.

Christopher E. Maling is principal-Retail Capital Markets at Avison Young