Fundamentals for Single-Tenant Net Lease Likely to Improve This Year

The single-tenant net lease sector is well positioned for improving fundamentals this year as construction remains tepid and more companies resume expansion plans. 

That’s resulting in quicker rent growth as retailers backfill spaces, according to a new analysis from Marcus & Millichap – a trend that is likely to accelerate as certain types of retailers continue to benefit from changing consumer preferences and behaviors.

In particular, car parts vendors are doing well as more consumers shift to vehicle ownership, which fast food restaurants have “generally recovered” in-house dining.  Wendy’s and Jack In The Box are both resuming previously paused expansion plans, for example, though labor shortages continue to plague the food and beverage sector.

The firm also notes that “a shortage of supplies coming in at higher prices may erode consumer demand as 2022 progresses and the possibility of future virus variants could reintroduce some pandemic shopping behavior,” but adds that the impact would likely vary by retailer.

Meanwhile, investors are “doubling down on proven concepts,” with deal flow for single tenant assets on a marked uptick vis-à-vis multi-tenant properties.

“Investors are maintaining focus on tenants that demonstrated resilience during lockdowns, including auto part stores, necessity retailers and fast casual restaurants,” Marcus & Millichap analysts note. “Inflation concerns put an emphasis on businesses that can leverage scale to provide better value for customers.”

REITs are also targeting assets with high credit grade tenants and longer lease terms, the firm said.

“The national single-tenant average is now pushing below 6 percent,” the report notes, while “competition from larger investors is pushing private buyers in the $3 million and under tranche to consider buildings occupied by noncredit tenants who weathered the downturn. The higher yields associated with these properties could become more appealing as interest rates rise this year.”

Against the backdrop of a series of planned rate hikes by the Fed, some investors and lenders are still cautious.  Asset location as well as tenant strength are both important factors lenders are examining, with properties closer to residential areas (as opposed to commercial districts) gaining more favor. Single-tenant properties net leased to tenants like national drug stores chains and grocery-anchored centers are also looked at more favorably, and Marcus & Millichap’s analysis notes that borrowers’ abilities to demonstrate minimally interrupted rent collections is a key factor. 

“The retail sector can never be painted with a broad brush, but that is especially true today, with property performance varying widely depending on a range of asset-specific features,” Marcus & Millichap notes.