While COVID-19 slashed transaction volume fell across the board in 2020, net lease held up better than other sectors.
“Starting in 2007, the bottom dropped out of CRE and volumes dropped dramatically in 2008 and 2009,” says Camille Renshaw, CEO and Founder of B+E.
At that time she noticed movement to net lease. “When you look down at the data relative to all the other segments, multifamily, self-storage, office or whatever, our volume spiked as a segment,” she says. “It was this flight to quality and security.”
In 2020, after a bit of a lull in the market, net lease again saw its share of transactions increase. The five-year average of net lease’s share of all commercial real estate investment activity is 11.8%. But in Q3, it was 18.4%, according to CBRE.
“What you want as a net lease investor is to power through these down cycles,” Renshaw says. “The same thing that happened at the beginning of the Great Recession has happened in 2020. I’ve talked to my friends in New York real estate, and they’re having rough years. They’re not getting much done. And, that’s not what’s happening in our segment.”
If this environment where shopping malls are struggling and the future of office is up in the air, investing in a portfolio with pharmacies, 7-11’s, grocery stores, FedEx’s and Amazon distribution facilities makes a lot of sense, according to Renshaw.
“This essential services category is definitely strong,” Renshaw says.
Those essential net lease assets aren’t just pharmacies. They’re also industrial facilities. For instance, Renshaw is brokering the sale of an asset housing a toilet paper manufacturer in Arkansas. While the asset may not fit the traditional definition of essential retail, its continued operation is a necessity.
“I don’t know if you’d call that essential services that most of us have been pretty desperate to make sure we have paper supplies,” Renshaw says. “There’s no question that it will fly off the shelf because of the underlying fundamentals and supply and demand. There’s not a lot of places to put capital, and everyone is really demanding about the quality of the tenant and the quality of the real estate. And that drives them to spend in net lease.”
One potential threat to net lease is tax law changes, especially ones that could impact 1031 exchanges.
But Renshaw isn’t concerned. She thinks there is a heavy lobbying interest in keeping these structures in place.
There are also new avenues for net lease to expand. “I don’t know if you want to call the kitchen industrial, but basically ghost kitchens are industrial,” Renshaw says. “If restaurants are not doing any in-restaurant dining and they’re only doing delivery and drive-through, that will be a trend happening in all of these [kitchen] spaces and another place where you’re going to see interest.”