Is COVID-19 Creating CRE Opportunities?

Aug 13, 2020

In a nation plagued by COVID-19, it may be hard to believe, but the pandemic is creating some commercial real estate (CRE) investment opportunities, namely in the triple-net (NNN) lease market. As the country continues to be in a holding pattern with everything from going back to school, returning to the office, and dining out, most NNN investment properties are thriving and expanding their business models, which is also creating new opportunities for investors.

COVID-Stable NNN Lease Property Investments

An increasing number of investors are trading higher-risk investments for NNN lease property investments that, in any economy, provide stable, responsibility-free monthly income and tax advantages.

These commercial properties are proving to be COVID-stable NNN investments because they are leased to essential or “needs-based” retailers who are creditworthy tenants operating under corporate-guaranteed leases. Tenants such as Dollar General, Walgreens, CVS, 7-Eleven, O’Reilly Auto Parts, McDonald’s, Dunkin’ Donuts, and other fast-food restaurants continue to increase sales, add employees, and evolve with the demands of the marketplace and COVID guidelines.

The main factor in these properties’ stability is the corporate-guaranteed lease. As a buyer, when you have an investment-grade corporation like Dollar General guaranteeing to pay the rent no matter what, you can rest easy knowing your monthly income is solid for ten to twenty years, regardless of COVID or an uncertain economy. No other investment can provide that level of assuredness.

New Opportunities & Changing Habits in the COVID Retail Market

McDonald's exterior

It just so happens that Dollar General, CVS, 7-Eleven, and other essential businesses are growing amid COVID rather than slowing. They are adding products and services that go beyond their original offerings, such as fresh produce and groceries, COVID safety products, health services, and Fed Ex. Their consumer bases are expanding too.

Let’s look at fast-food for a moment. Many quick-service restaurants (QSRs) just released earnings for Q2 and surprised us all. According to CNN Business, as of August 1, “McDonald’s said roughly 90% of its U.S. sales came through its drive-thru lanes and markets that have a lot of drive-thru locations are recovering faster. Taco Bell-owner Yum! Brands said it served an additional 5-million cars through its drive-thrus compared to the same time a year ago.”

The QSRs with online ordering also grew substantially. “Every company seems to have a digital success story, including McDonald’s, Starbucks, Domino’s, Chipotle, Yum! and Dunkin’, all of which reported a spike in digital sales.” Most have also added products they’ve never had before but realize people need. For example, Dunkin’ Donuts now has a selection of non-coffee drinks, as well as snacks, which appeal to those in their new “rush-hour” which is between 11 am-2 pm (as opposed to previous early morning and evening drive times).

These fast-food companies are also reaping the benefits of bigger orders per customer, as are dollar stores, retail pharmacies, convenience stores, and other retailers. More customers are feeding their families rather than grabbing a quick snack or stocking-up on groceries rather than stopping more frequently, as they would’ve pre-COVID.

This strange yet increasingly functional COVID world we are living in has given way to NNN lease properties with even more stability and the opportunity to turn higher-risk investments into reliable monthly income. – Jason Simons, VP Westwood Net Lease Advisors

COVID Investor Opportunities

Businessman with dollar sign .

Obtaining a commercial mortgage is possible and with the lowest interest rates the market has ever seen, the opportunity for higher ROI exists. Fortunately, banks and other financial institutions have returned to lending for e-commerce and recession-resistant businesses. More lenders are also beginning to lend again for fast-food restaurants, with a discerning eye on the loan-to-value (LTV) ratio, which determines overall financing.

If you’re not aware of how LTV works for NNN lease investments, several factors play a role in the calculation, which right now more than ever, works in the NNN investor’s favor. Banks look at the tenant’s creditworthiness, the length of the lease, rent increases over the term of the lease, and the location. The key factor in this process is tenant creditworthiness. Many essential, NNN-lease businesses are investment-grade corporations that meet and exceed these lending requirements.

When you obtain debt to purchase a NNN property rather than paying all cash, you may have the opportunity to purchase more than one property to diversify your portfolio and increase your monthly income.

Paying cash? If so, NNN property availability is wide open. Cash buyers are able to act fast and invest in prime properties without delay. More investors are selling high-risk investments or using the 1031 exchange to trade high-maintenance properties for NNN properties. Though cap rate is an indicator of risk, it’s also a gauge for your cash-on-cash (CoC) return. The higher the cap rate, the higher your CoC. However, though cap rate is an important factor in evaluating a NNN lease investment opportunity, it should not be the sole focus in your investment strategy.

Whether you’re a cash buyer or obtaining debt for a NNN investment, don’t wait for listed properties to be advertised on the open market. Engage a reputable Westwood buyer’s advisor right away who has first-hand knowledge of properties under development and those getting ready to sell. Approximately 50% of the properties our clients purchase are never listed.

To Wrap it Up – There Are Stable Investment Opportunities Amid COVID

As essential businesses evolve with the requirements of COVID-19 and the unique needs of their customers, they are also creating new NNN investment opportunities. Financial institutions are trusting and lending again, and there is a steady stream of solid NNN investments out there, generating solid, long-term, reliable investment opportunities for the investor.

Throughout the COVID crisis, Westwood Net Lease Advisors have helped numerous buyers close on properties that may have otherwise fallen through due to lending or other complications, and we remain in daily contact with lenders, attorneys, and other industry professionals. 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.

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