We all are acutely aware of the negative impact the coronavirus will have on commercial real estate. While no one is making absolute predictions, we in the commercial real estate arena do know that the effect will put upward pressure on CAP rates. Of course, if you’re in the market to buy properties this is a net positive for you. Sellers, not so much. Today I will focus on the effects of COVID-19 on Single Tenant Net Leased (STNL) properties.
What Are STNL Properties?
STNL properties are the properties we see in virtually every city and town in America. They are the free-standing establishments that go virtually unnoticed, in terms of investment property. You know, the CVS drugs store or the drive through restaurant or even the big box retail store such as COSTCO or Sam’s. You may see them called different names such as:
Triple Net (NNN)
Some of properties are actually owned by the company doing business out of the space as the owner occupant. However, many are leased from commercial real estate investors who specialize in that niche. This is a major sector in CRE investment and like others during this time, will be hard hit by the crisis.
Who Invests in NNN Properties?
There are two primary groups of Individuals and companies that invest in NNN properties:
Individual STNL CRE Investors
Individuals investing in NNN properties often are longtime real estate investors who previously actively managed their investments. These investments might have been shopping centers, single family portfolios or even multifamily investments. When these investors get ready to retire from active management, they often will be faced with large capital gains payments if they sold outright.
Additionally, long term real estate investors are savvy of the income potential from real estate investment and wish to continue that into retirement. STNL investments gives them the opportunity to remain in real estate, receive income and delay capital gains taxes through a 1030 exchange without going into an actively managed portfolio by an outside entity (e.g. DST – Delaware Statutory Trust).
CRE Investment Companies and Syndicators
I am currently working with companies investing in NNN properties throughout the US. When making these investments in they are not limited to a particular geographical area. They typically are able to make quick decisions and have systems in place along with specific criteria for making investments decisions. A plus for working with companies and/or institutional investors is that they have funding in place and make cash transactions. This significantly shortens the transaction time, not to mention the bargaining power of being able to fund the deal.
NNN Properties and CAP Rates
For the past few years at least, CAP rates on NNN properties have been really low. I’m not talking about just in the single digits. I’ve seen properties in the major primary markets trading around a 5 CAP, plus or minus 1-2%. That is a tight squeeze to say the least and leaves no room for error or shifting economic conditions.
While skilled STNL investors are conscience of the risk-reward concept I’m pretty sure most of they did not make decisions based on an economic shock to the system. Mostly they choose investments where they did not have to actively manage properties and the associated lower cap rates are reflective of that.
Where Do We Go From Here?
The short answer is we will continue to serve our clients in buying and selling NNN properties. However, the real answer is that we will all have to adjust. Some properties owners will become distressed and not recover. Others will have enough reserves to weather the storm. Still others will become opportunistic buyers.
Already this week I have started to see properties offered significantly above the previous 5 CAP rate. I’m now seeing around 8 CAP rates on STNL properties. Consistently. So, what does this mean? It means there are opportunities for buyers to buy and sellers to sell, albeit at different rates and terms than imagined a year or even six months ago.
About the Author
Shirley Johnson-Boyd, MBA, CCIM, CIPSis a Global Real Estate Consultant licensed in Virginia, Maryland and Washington DC. She provides selling, buying and investing advisory services specializing in CRE. This article may be shared with attribution. You may contact Shirley at www.JohnsonBoyd.com/contact