Triple Net Investors Eye a Fresh Set of Assets

Commercial real estate investors met the uncertainty of the pandemic with a rush to stability, and in growing numbers, triple net lease (NNN) investments. But with plenty of competition among investors for the more traditional retail assets, it brought attention to a fresh set of product types, says Ryan Bennett, principal at Lee & Associates.

“Because of the competition on the retail side, especially essential retail, we’ve seen traditional retail investors pivot toward single tenant industrial,” Bennett said. “Anything to do with e-commerce is extremely hot right now—we’re talking about Amazon last mile distribution facilities and Fed-Ex distribution facilities for example.”

E-commerce related industrial assets are so hot in today’s market that Amazon facilities in B markets are now fetching A market pricing, and big box retail locations are being targeted for conversion to future fulfillment centers, Bennett reports. The multi-tenant retail market had been a different story. Now that product type has bounced back as investor concerns during the pandemic of retailers not paying rent have subsided.

“Investors are saying wait, I can acquire a newer two or three tenant neighborhood retail shopping center with minimal management responsibility and get a 100-150 basis point higher return,” Bennett said. “That property type’s come back 100 percent, and we’re now getting multiple offers and selling them fairly quickly.”

Some things haven’t changed in the NNN sector, such as the high demand for credit (and now essential) retail tenants with long term leases. From Walgreens and CVS to Lowe’s and Tractor Supply, the more essential the retailer and the longer the leasing term the higher the price attained on the asset. Anything with 10+ years of term is going to fetch a premium but, the market is so under supplied compared to current investor demand that cap rates for properties with 6-8 years of lease term have significantly compressed. The pandemic has pushed more investors to flock to the perceived “safe” Net Lease market and the supply has not been able to keep up with demand.

“When you have that imbalance between supply and demand, you see cap rate compression and an incredible amount of competition in the marketplace,” Bennett said. “We’ve never seen anything like it in terms of the amount of capital chasing essential net lease product. I’ve never seen cap rates this low and the market this voracious.”

Although there are less institutional players in the net lease market due to consolidation, those even bigger investment firms are facing rising pressure to deploy massive amounts of capital. Because of that, institutions have been forced to come down on their yield requirements for e-commerce related industrial product and Internet-resistant retailers, as well as quick-serve restaurants with drive-thrus. Bennett asserts that individual private 1031 exchange buyers are still paying the premiums in the NNN sector, but an “incredibly tight market” has created the seller’s conundrum: investors selling at the top of the market are worried about finding a suitable replacement property or “upleg” within the allotted exchange period.