Randy Blankstein, president of The Boulder Group, has been in commercial real estate since 1991.
And he’s never seen a net lease market like the one that exists today.
“It is so bifurcated,” Blankstein says. “It’s the craziest market I’ve ever seen. You either have something that everybody wants, or you have something that you can’t even get a bid on.”
If a McDonald’s or Starbucks is on the market, multiple bidders will enter the fray. “Everybody wants the big names that are doing well, and nobody wants anything else,” Blankstein says. “With fitness centers, like LA Fitness and tenants like that, there are just no bids.”
Movie theaters are another trouble spot. “People don’t know what’s going on with the movie industry,” Blankstein says. “They have no idea when it comes back. So people are making worst-case assumptions, and it’s hard. It’s hard to sell property on a worst-case assumption.”
People aren’t even taking a flier on these hard-hard retailers. Many potential buyers would rather wait for things to stay after COVID before jumping in. Sellers understand this.
“Sellers don’t want to open it up to a terrible bid,” Blankstein says. “They understand that the business model needs to be repaired, and things need to change. So, all the second-tier properties are being held off the market because people understand there’s no demand for it. So it has become a market of A-rated, investment-grade tenants.”
Some of these owners of real estate with non-essential tenants may not be able to hold on forever. If they have debt coming due soon, they may have to sell into a bad market. If they want to refinance, they’ll need more equity.
“If there isn’t debt coming due, there’d be no reason to put a movie theater on the market today unless they had to for a death, divorce or a loan coming due,” Blankstein says. “You don’t want to put it on the market because the bids would be so far off what you paid for it.”
In the short term, Blankstein is hopeful that owners with struggling properties can talk to their lenders and push their issues down the road.
“But next year there will be a point where, if the market hasn’t turned by then, I think you’ll see a lot more product in the market,” he says. “Right now, everyone’s attitude is, ‘Let’s push it to next year and see what happens.’ If things don’t turn around in the second quarter of 2021, I think some of these properties will have to come to market.”
Still, there are positives. Blankstein says the two IPOs in the sector—Broadstone Net Lease and Netstreit—are a sign of the underlying strength of essential net lease properties.
“The reality is net lease is the bond sector of the real estate market. It’s a safe, conservative cashflow sector,” Blankstein says.