Single-Tenant, Triple Net-Lease Properties Are 'Essential 'Investment During Pandemic

As retail struggles on multiple fronts, some hidden-in-plain-sight categories in the sector keep drawing in investors: essential businesses.

According to a new JLL report, single-tenant, triple net-lease properties continue to attract investors. These properties often have grocery stores, pharmacies and hardware stores, which have remained open during the COVID-19 pandemic while businesses deemed nonessential closed up shop.

“Single-tenant net-lease assets sit at the crossroads of Main Street and Wall Street,” Mark West, JLL senior managing director of capital markets, said in the report. “Investors are largely getting a hard asset and long-term, durable cash flow. As a general rule, net-lease properties provide a very good risk-adjusted return compared to a bond.”

Transactions for single-tenant net-lease deals of $5 million dipped 9% year over year in the first quarter, according to the report. JLL attributed the decline to logistical difficulties in conducting due diligence related to closings because of the pandemic shutdowns, not to lack of interest.

“In times of stock market volatility, equity investors often seek the relative stability and hedge against inflation that NNN assets are known for, making these properties well-positioned to maintain or increase their values — even as values of other properties risk substantial declines in the near term,” the JLL report said.

In distinguishing essential retail from other categories, JLL points to Commerce Department figures showing year-over-year retail sales in April dropped 19.9% as a whole, while grocery stores sales jumped 13.1%.

Activity for triple net-lease properties, or NNN properties, in the industrial sector remained steady during the downturn, too, according to JLL. Distribution properties, where goods sold in essential businesses and via ecommerce pass through, have “nonetheless have become just as essential as NNN retail buildings,” the report said.

“We’re seeing the buyer pool fill up,” said John Huguenard, JLL senior managing director, head of industrial capital markets. “In particular, international investors that in the past focused on portfolio transactions are now hunting for one-off, net-lease logistics buildings.”

To get specific with industrial, the Department of Homeland Security in March classified cold storage facilities as essential infrastructure. “Cold storage has emerged as the most dynamic component of the real estate and infrastructure asset class,” said Alex Langerman, COO of Cold Summit Development.

For strip malls, grocery stores in particular have played a particularly positive role for some REITs. Price targets are up for some strip malls REITs anchored by grocery stores.

Cap rates in the net lease retail sector rose 10 basis points in the second quarter to 6.25%, according to The Boulder Group. The report noted, however, that cap rates fell six basis points for industrial properties, driven by e-commerce demand, to 6.99%.