Single-Tenant Grocery Still Requires Due Diligence

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LOS ANGELES—Daily needs-type tenants—namely grocery stores—have become a safety net for single-tenant triple-net investors, but Chris Sands and Dan Hoogesteger of Sands Investment Group say that doing due diligence and checking the back debt is still vital. This is true for national credit tenants as well as local operators. Although grocery is strong, it doesn't eliminate the risks of a single-tenant property.

"One of the things that people need to look at for grocery stores specifically is the back debt," Hoogesteger, a principal at Sands Investment Group, tells GlobeSt.com. "When you are looking at a fast food restaurant or a smaller building, it is much easier to replace a new tenant. When you start talking about single-tenant buildings that are 70,000-plus-square-feet, there are not a lot of operators or users that can back fill that space if for some reason you lost a tenant. Furthermore, if you lost a tenant, you have to wonder if another tenant would have the same challenges. There is a level of due diligence, which is why, based on the price point, you are dealing with a smaller pool of buyers and a more sophisticated pool of buyers."

For this reason, more institutional type tenants tend to gravitate toward single-tenant grocery investments. "Not every buyer that is a mom-and-pop buyer off the street has the sophistication level to do that type of due diligence and to understand or feel comfortable with it, or the funds to put into one asset," adds Hoogesteger. The duo recently closed on two single-tenant grocery transactions totaling four stores and nearly $50 million. In all of those sales, they made sure to complete all the due diligence on the tenants' history.

The good news, though, is that grocery stores generally report sales, making it easy to review the strength of the tenant and its longevity in a location. "One of the things that is attractive from an investor standpoint in terms of mitigating risk is that these grocery stores typically report sales, so you have the ability to monitor sales," Sands, the founder of Sands Investment Group, tells GlobeSt.com. "That is another variable in the investment that the buyer can use as a metric to determine the probability of the tenant staying. That is another reason why the grocery store concept has been really desirable, whether it is private or institutional."

This has helped to fuel the high demand for grocery tenants, because they can be a more stable option. "The buzzword for big box clients is grocery stores," says Sands. "There are clients that have built their whole business plan around this concept." Hoogesteger adds that demand for this product has been growing for the last few years. "There has been a consistent demand, and I think that you can say over the last few years that the demand has been increasing," he says. "Certain subsectors of net lease have become obsolete and people have turned more to the daily needs."