Single-Tenant Net Lease Finds Stability Through Pandemic

Single-tenant net lease properties are finding stability through the pandemic—making them a standout in the retail market. Investors are taking note.

A new report from Colliers International forecasts that investment-grade triple-net tenants should produce higher leveraged returns for investors over the next several years, and investors are actively seeking and competing for these opportunities. These properties will remain particularly popular for 1031 exchange investors as well. As a result, Colliers is predicting cap rate compression in this market, although it will depend on the sector, location and the tenant quality.

Private investors are driving this market. In 2020, 70% of the capital on single-tenant net lease transactions came from private investors, while institutional investors accounted for 13.4% and owner-users accounted for 11.7% of deals. REITs showed limited activity, accounting for less that 1% of deals. There is demand for these deals from larger institutions, but there have been few opportunities for institutional capital sources to transact in the market. That said, Colliers expects institutional transactions to increase in the second half of the year. Another data point of note: most of the transaction took place in suburban markets, with only 8% of transactions in urban areas.

In terms of property type, quick service restaurants and dollar stores have been among the most resilient in the single-tenant net lease market. Quick-service restaurants have outperformed full-service restaurants through the pandemic. In addition, quick-service restaurants had an easier time adapting to local restrictions on dining. Starbucks led the market at $925 per square foot, followed by Chipotle at $885 per square foot and McDonalds at $715 per square foot. At the lower end Pizza Hut posted $345 per square foot and Arby’s at $378 per square foot. Dollar stores have also outperformed other retail asset classes.

Dollar General has also performed well, expanding its footprint by 2.6% and gaining 426 locations throughout the pandemic. Dollar Tree & Family Dollar posted a more modest expansion, gaining 51 units. Because all three major drug store brands are credit tenants, investors have flocked to this sector.

Drug stores were well positioned to lead this space, but they have posted poor earnings during the pandemic. Walgreens announced cost containment measures and appear to have store closings coming in response to its announcement of $750 million in negative operating income. In addition, Amazon purchased PillPack, creating more competition for online pharmacy and prescription. One bright note for the category is  the aging population and the ongoing expansion of the healthcare industry, both of which will likely drive drug store growth in the long term, making it an attractive investment for the right capital.