In the COVID economy, there is a lot of speculation about what is happening in the triple-net (NNN) lease investment market, and confusion about which retailers investors should buy, which retailers to avoid, and if you should be investing at all right now during the pandemic. In this article, Westwood Net Lease Advisors answers these questions and explains how to make a smart NNN investment during these turbulent times.
Essential or “Needs-based” Retailers are Still Strong NNN Investments
Even in the COVID marketplace, Westwood Net Lease Advisors is firmly rooted in the belief that NNN lease property investments are one of the best ways to earn income, build wealth, and maintain a solid investment strategy. Why? Most NNN property tenants are investment-grade corporations that offer a reliable monthly income for up to twenty years and realize plenty of capital-preserving benefits.
NNN properties typically include essential or “needs-based” retailers with creditworthy tenants and corporate-guaranteed NNN leases. During the last few months of COVID-19, these stable entities, which include tenants such as Dollar General, Walgreens, CVS, 7-Eleven, O’Reilly Auto Parts, and some fast-food retailers, continue to increase sales, add employees, and evolve with the marketplace and COVID guidelines.
Never before have we seen business trends for a pandemic, but historically, needs-based retailers tend to thrive in tough economic times. – Westwood Net Lease Advisors
Consider NNN Investing in the Following Retail Properties
Dollar General is a steadily growing company, adding around 1000 strategically located properties annually while increasing year-over-year sales from needs-based, recession-protected consumer products and services. The company reports that heightened demand for household essentials during the COVID-19 crisis so far has led to hiring 50,000+ employees and a first-quarter net sales increase of 27.6%.
Dollar General is ranked among our top 25 corporate responders to meet the challenges presented by the COVID-19 pandemic. – Forbes Magazine
A Dollar General NNN lease investment property will typically sell for $1-2 million so it is a great option for the first-time investor, seasoned landlord, or someone who wants multiple locations throughout the country. Stores typically operate under 15-year absolute NNN leases with 10% rent increases every five years during option periods and provide 6.00-7.00% cap rates.
Since the onset of COVID-19, 7-Eleven Inc., the world’s largest convenience store retailer, has hired as many as 20,000 new store employees, either directly or by independent franchisees, to meet the increased demand for products and services at its 7800+ company-owned and franchised stores in North America.
As of July 13, 2020, 7-Eleven opened its 71,100th store. Today, 7‑Eleven operates in 17 countries and opens a store somewhere in the world approximately every 3.5 hours. – 7-Eleven Corporate
Many 7-Eleven location types – walk-up, gas station, and C-stores – are in prime locations with an average traffic count of 25,000 vehicles daily, which enhances their value. Gas station stores, corner locations, and shopping center sites typically operate under 5- to 20-year NNN leases with 5-10% rent increases every five years, and sell in the region of $2 to $6 million, offering 4.50-6.00% cap rates.
O’Reilly Auto Parts Stores
As one of the most successful auto parts retailers in America and an exemplary net-lease investment, O’Reilly Auto Parts operates 5,512 stores in 47 U.S. states and reported a Q1 2020 sales increase of $66 million. Though the stores are not absolute triple-net (NNN) leased properties, they require very little active management, which makes it viable to own a store in any state, no matter where you reside.
Investors can expect to pay $2-$2.5 million for an O’Reilly property and earn a 5.50-6.00% cap rate. Stores operate under 15- to 20-year leases with five-year renewal options. Given the price point and low maintenance, these properties make a great complement to a current mix of commercial income properties or as a first-time investment.
CVS Health is now the largest pharmacy-led healthcare company in America with approximately 10,000 U.S. retail locations and approximately 1,100 walk-in medical clinics serving an estimated 38 million people.
Since the coronavirus pandemic, CVS has hired roughly 50,000 people, and in the past year, the company opened 100 HealthHub locations – a new format dedicating more space to a broader range of health care services like diabetes care and telehealth. Despite COVID, CVS says it still plans to bring its HealthHub stores to a total of 1500 by year-end 2021.
CVS stores typically sit on 1.0-2.0 acre hard-corner lots that sell in the $4-7 million range with 5.00-6.00% cap rates and 10-20 year lease terms.
Walgreens currently has over 9,300 U.S. retail stores and in the next five years, plans to open 500-700 in-store clinics with primary care doctors on-site. In April, in response to widespread COVID testing needs, Walgreens opened drive-thru testing locations in 49 U.S. states and Puerto Rico, and expanded drive-thru shopping to include household goods, cough/cold, and pain relief, grocery items, baby formula, and medical supplies, and now offers free Rx delivery.
The average Walgreens store has 10,500 square feet of retail space and 3,000 square feet of non-public space. The company has an investment-grade credit rating (S&P BBB, Moody’s Baa2) and offers a stable outlook, which improves the value and marketability of its properties. Additionally, to compete with main rival CVS, Walgreens will pay premium rental rates to secure Grade A sites with primary absolute NNN lease terms of 25 years. Investors can expect to pay between $5.5-10 million with cap rates in the 5.25-6.50% range for this highly beneficial, long-term investment.
“Nearly 4 in 5 Americans live within 5 miles of a Walgreens store or one of its other brands, including Duane Reade, while about 7 in 10 Americans live within 3 miles of a CVS.”– USA Today
Is a Fast-Food NNN Property a Good Idea?
During the COVID-19 pandemic, by government direction, any operating fast-food restaurant should provide contactless ordering, fulfillment, and delivery. Most QSRs have mobile-app ordering and curbside-delivery in addition to drive-thru services, which has helped keep many fast-food companies busy when casual dining and other types of foodservice have had to temporarily shut down operations. The companies handling the COVID crisis well are seeing steady sales, which still makes them viable NNN lease investments.
What will happen on the other side of the crisis? Restaurant professionals predict that the off-premise business model many have been forced to adopt or improve will strengthen the fast-food industry post-COVID-19 and change it for the better.
QSR Magazine reports 45% of consumers are still consuming meals away from home and predict that to rise back to 63% 6-12 months after lockdown. According to one study, the post-COVID fast-food market share will still hold the pre-COVID-19 level of 39%.
If you find yourself in a stalled QSR transaction or interested in a fast-food NNN lease investment, it’s best to reach out to a Westwood Net Lease Advisor for help. In this uncharted territory, a professional who knows the industry and has the resources to help you navigate your situation will ensure your best interests are represented and that the investment works in your financial favor.
Other Recession-Resistant Investment Options
Other stable, recession-resistant net-lease investments include e-fulfillment centers and some industrial businesses, tire centers, medical clinics, and gas stations. Despite COVID, these types of businesses report strong revenue, instilling investor and lender confidence in their long-term viability.
Retail Property Investments to Avoid
With the uncertainty of the market and consumer shifts to more home-based work, non-essential online shopping, socially distant exercise, and in-home dining, office buildings, dine-in restaurants, fitness centers/gyms, and clothiers are retail properties you may want to avoid.
If you own a multi-tenant NN property or non-essential commercial real estate investment, you may consider selling in a 1031 exchange and trading up to a more stable, single-tenant NNN lease investment with a creditworthy tenant, as noted previously.
Diversify Retail Property Types for Extra Stability
For added NNN investment stability and to balance risk with reward, it may be wise to diversify within your own NNN investment holdings. You may consider owning properties throughout the country with different location and tenant types, asset classes, lease durations, and industries such as retail, medical, industrial, warehouse, QSR, pharmacy, banking, and gas stations. This provides a range of risk and income opportunities for more dependability in any economy.
To Wrap it Up – NNN Investment Properties You Should Buy
At Westwood Net Lease Advisors, we are watching the market carefully during COVID-19 and helping clients invest in essential retail and other NNN lease properties that are providing worry-free, long-term investment opportunities, and stable monthly income.
Additionally, throughout the COVID crisis, we have helped numerous buyers close on properties that may have otherwise fallen through due to lending or other complications, and remain in daily contact with lenders, attorneys, and other industry professionals while we continue to evaluate NNN developments. If you have questions about your prior, current, and future net-lease investing opportunities – we are here to offer perspective and advice and help you with your investment needs, at no charge. Contact us today for your no-obligation consultation, 314-997-5227.