Net Lease Provides Stability in the Midwest

For the past decade, investors have been on a roller-coaster ride that is almost unprecedented in the history of economic cycles. The same belief was held about the stock, bond and alternative investment markets. In the past few years, the ride has gotten scarier. It no longer stops when people want to get off, and there have been some accidents. The implicit faith in the construction of the system has waned and the ride is no longer thrilling, but terrifying to many investors.

Where are investors turning to regain their equanimity? Net-leased real estate fits the bill. These investments have long-term leases backed by large corporations who reliably pay their rent. When acquired on an all-cash basis, net leases offer returns that are more than double similarly termed government bonds. They often provide returns higher than the lessee's corporate paper and leases that call for set rent increases that further boost investor returns.

Investing in Midwestern net-lease properties further advances the trend toward stability. With the exception of high-profile sites in the Chicago area, the Midwest has not seen the cap rate extremes reached in the Sunbelt and on both coasts. In addition to a secure income stream, investments in the Midwest have shown a more reliable value in the asset itself, with land costs and rents that are more affordable for corporations than in other areas.

From St. Louis, up to Minneapolis, down to Indianapolis and over to Columbus, the major cities in the Midwest have all been popular areas for investment. We are also seeing demand return for Michigan and northern Ohio properties. The federal government's determined support of the automobile industry is working. Chrysler just reported a net profit of $183 million in 2011, its first time in the black since 1997, and General Motors reported a profit of $7.6 billion, a record for the largest automaker.

Meanwhile, Walgreens and CVS continue to open new stores, albeit at a much slower pace. We are also seeing aged drugstores that have a real estate story, and/or a well above average sales history, find their way to the market successfully.

HH Gregg has embarked on an aggressive expansion program, especially in the Chicago area, taking advantage of the opportunity to backfill empty Circuit City space. Mariano's, Roundy's new grocery concept in the Chicago area, has opened four stores, all very strong. They are expected to open four to five new stores per year for the next five years. That, along with Roundy's anticipated IPO, should firm up demand for their Wisconsin and Minnesota stores. Even Wal-Mart looks to be continuing expansion in the Midwest, which should provide the opportunity for many single-tenant out-lots at their sites.

Despite the slowly advancing stock market rally, uncertainty about financial markets rules the day. As investors offset those emotions by increasing their allocation to fixed income, well-leased, single-tenant properties are about as comfortable as it gets.