Net Lease Trends for Q3 2018

May 7, 2018

Trend #1: Investors Will Turn To Secondary And Tertiary Markets For Strong Yields

As competition continues to be strong in primary markets, more net lease investors will bypass the big cities and head for secondary or tertiary markets instead.

While some investors feel they don’t have a choice in the matter -prices in primary markets can be double those in secondary or tertiary markets – other investors enjoy the thrill of finding the diamond in the rough that will give them high yields at relatively low prices. These investors are less interested in trophy properties and more concerned with maximizing equity on a property.

For other net lease investors, starting in a secondary or tertiary market is the only way to get started owning income properties. Plus, growing populations, above-average job growth, a highly educated populace, and an influx of tech companies mean these markets will continue to grow, ensuring there is plenty of opportunities.

Trend #2: Net Lease Investors Will Continue To Invest In Dollar Stores

Dollars stores will continue to be popular among net lease investors.

net lease investors will continue investing in Dollar stores in 2018

Dollar stores are no longer the purveyors of cheap quality goods. Although at one time wealthier consumers avoided shopping at dollar stores, many now view them as a great way of finding bargains, especially since franchises have started increasing the quality of their generic brands and adding name brand products to their shelves.

Budget-conscious consumers are drawn to shop at their local dollar store regularly since they know they can consistently find high-quality products at reasonable prices. At the same time, brand-conscious consumers who might never have thought of shopping at a dollar store, have begun taking advantage of low prices as well.

In order to continue to attract new customers, some dollar store franchises have begun expanding their selection to include grocery and drug store products like quick prep foods, ready to eat food, and refrigerated and frozen foods.

This helps them increase foot traffic, as well as increase the number of times shoppers frequent their store per week.

They’ve also expanded the number of beauty and cosmetic products, offering a wide variety of essentials at competitive prices – often even lower than those at national drugstores. And in an effort to become a one-stop destination for consumers, some dollar stores, like Family Dollar, even add in-store signs encouraging consumers to compare prices to CVS and Walgreen’s.

Trend #3: Industrial Properties Will Continue To Be A Favorite

Industrial continues to run strong. Ranked as one of the top three asset types, sales in the market hit $59.2 million in 2017- the second highest total in the history of the industrial real estate, with an average cap rate of 4.8% and vacancy rates at just 5%.

Investors continue to purchase industrial assets in gateway markets, which are the strongest in terms of stability and profit potential; however, there are a significant number of investors moving towards secondary markets such as South Florida, Seattle-Bellevue, and Orange County.

Industrial properties have given investors the opportunity to take advantage of growth in the e-commerce sector, but as the industrial market continues to mature and gain more acceptance as a major asset class, the perception of risk in the market will change.

Most likely, financial underwriting for industrial properties will continue to evolve, and more aggressive underwriting is expected to follow for the next five to 10 years.

Trend #4: Investors Moving Out From Traditional Retail To Quick Service Restaurants

investors are moving from Retail to Quick Service Restaurants

The QSR niche is doing well despite the ups and downs of the retail market. Because QSR’s offer an experience that can’t be delivered online, the market is actually doing well.

QSR’s are also ideal for investors who’d like to diversify their portfolio with a different type of asset, but since QSR properties are usually triple net leases, they are low risk and offer a stable stream of income.

The trend in the industry right now is towards providing restaurant-goers with the food they crave, when and how they want it.

That means more QSR’s are offering healthier foods as an option, with some restaurants offering fresh, organic, locally-grown food prepared on site. Other companies, in an effort to catch up to the millions of mobile users, are adding as many ways as possible for customers to purchase food.

For example, Jersey Mikes has been heavily promoting their online ordering program, which allows customers to go to the head of the line by ordering through their app or website.

Other companies are exploring novel ways to deliver food through a third party, such as UberEats, or through fully automated self-service kiosks.

Investors who want to stay profitable in the QSR niche would do well to carefully investigate not just the creditworthiness of the tenant, but also whether or not the tenant understands consumer needs and trends in the market – and whether or not they are implementing a plan to address those needs.

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