Retail Bright Spots Exist for Savvy Net Lease Investors

Don’t believe everything you read. If you do, you’re likely to make the assumption that all of retail is a vast wasteland, that bankruptcies and defaults are the only order of the day and all a formerly vibrant shopping center is good for now is conversation to a fitness center.

Readers of this blog know better. As do readers of GlobeSt.com. In two recent articles, GlobeSt made it clear that retail investments (and for our purposes, net lease investment) can be a profitable thing. It’s really a matter of where you look.

First, know what you’re buying. As reporter Les Shaver revealed, Starbucks, for instance, is not only opening new stores (a whopping 22,000 in the next 10 years) but it is also experimenting with new formats, such as curbside pick-up, an obvious nod to the current social distancing necessity.

Convenience and dollar store categories have always ranked consistently strong in the Avison Young Cap Rate Report. (In the third quarter, the sectors posted cap rates of 5.68 percent and 6.93 percent respectively.)

The GlobeSt article bears this out, pointing to 7-Eleven, which is planning more than 6,000 new openings, and Dollar General, with 1,000 in the works. This is clearly more than simply whistling in the dark or hoping for a brighter tomorrow. The company earlier this year opened 500 new stores, a clear proof of market confidence. Dollar Tree is also in the midst of cutting ribbons on 500 new stores.

Other counter-cyclical winners in the retail category are O’Reilly and Jiffy Lube, automotive retailers that, much like the above categories, have pretty well held their own throughout the pandemic. (The sector posted a 6.5 percent cap rate in Q3.)

But it’s not just who you buy, but where. Another GlobeSt article adds that wrinkle to your possible pandemic investment strategy: Lower your geographic expectations. If you’re gunning for New York City or Los Angeles, maybe you want to look more toward smaller, less competitive, markets

As the article states: Investors should “consider several smaller markets, including Boise, ID; Chattanooga, TN; Des Moines, IA; Greenville, NC; Knoxville, TN; Omaha, NE; Portland, ME; and Richmond, VA. Those cities reportedly feature lively downtown corridors, cultural diversity, amenities and a lower cost of living—and of doing business—than other cities.”

Retail has suffered a one-two punch of changing influencers in recent years. The growing presence of e-shopping prior to the pandemic forced all traditional retail models to morph into so-called “experiential” strategies, to provide the personal touch one couldn’t get on the web. But we’ve always maintained that internet shopping alone wasn’t the cause of brick-and-mortar defaults as much as an inability on the part of certain retailers to keep up with changing tastes and develop an omnichannel approach.

This year and the spread of COVID-19 changed all that. The fear of being in enclosed public spaces drove people out of the stores and into the arms of their laptops, smartphones and iPads, dramatically increasing the rate of bankruptcy and impacting even those retailers who successfully fought off the first wave of digital attack.

But there are those that have proven their resilience throughout the pandemic and the threat of e-commerce, providing a safe haven for net lease capital. There are categories, and brands within those categories, that continue to prove themselves—in fat times and lean.