NNN: Steady Commercial Real Estate in Unsteady Market

Nov 2, 2022

Climbing interest rates, a tense geopolitical climate, and an uncertain economy can concern even the most experienced commercial real estate (CRE) investors. Notwithstanding, this may not be the best time to let your money sit idle when it could help you preserve wealth in the steady triple net (NNN) lease market.

NNN essential retailers, medical clinics, gas stations, fast food, drive-thru, and quick service restaurants (QSRs), child care and early learning, and drug stores continue to strengthen their brands and report record sales when other CRE brands and property types are struggling.

Examples of NNN retailers that continue to grow include Dollar General, which opened 227 new stores in Q2 alone (as part of 1000+ openings for the year), and Starbucks, which announced consolidated net revenues up 15% to a Q2 record of $7.6 billion.

According to WealthManagement.com, “Over the past 12 months, more stores have opened than closed. After 70 retailers declared bankruptcy in 2020, the retail sector is now seeing the lowest levels of bankruptcy filings in the past five years.”1

Stacks of coins with a man's hand running a graphically designed shopping cart up the stacks

Is it Risky to Invest in NNNs in a Volatile Economy?

In a volatile economy or in any economy, NNN properties are lower-risk investments, providing 10 to 20 years of monthly income, no-hassle ownership, and, in most cases, a lease guarantee from a strong national brand.

Unlike the stock market and other types of high-maintenance real estate, when you own a NNN lease property, you have a tangible asset that offers the security of monthly income backed by a lease, and the potential for hassle-free cash flow.

Triple net investments …

  • preserve cash flow, provide reliable monthly income, and yield increasing returns for up to twenty years or more if lease options are exercised.
  • are in high demand, so they are typically easier to resell; you could, in effect, sell and buy triple net properties in 1031 exchanges to maximize your wealth for years to come.
  • operate with 10- to 20-year leases, which are legal contracts from high-credit tenants or multibillion-dollar corporations that guarantee to pay rent for the lease term.
  • can contain built-in, pre-set, incremental rent increases that increase your monthly income and hedge against inflation.
  • offer tangible real estate value that adds security, stability, and possible leverage.
  • typically liberate the landlord of all or most maintenance, management, and expenses.
  • make great 1031 exchange properties as they are straightforward and known for closing within the tight 1031 timeline.

Purchasing one NNN property or a mix of properties in various locations, with different tenant types, lease terms, and asset classes, can balance risk and reward and provide tens of thousands of dollars of responsibility-free monthly income. No other investment type offers as many benefits to the investor, even in an unpredictable economy.

In the FY 2022 Q2 earnings call, Dollar General, now with 18,500 stores, announced $9.4 billion in second-quarter sales, a 9% increase over Q2, 2021. Jeff Owen, COO, stated, “For 2022, we now plan to execute in the range of 2,930 to 2,980 real estate projects in total, including 1,010 to 1,060 new stores, approximately 1,795 remodels, and about 125 store relocations. Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business.”

Triple net property collage with diff asset types

Speaking of the Unpredictable Economy … What About Cap Rates & Pricing?

If you read the headlines and simply look at advertised CRE cap rates, they appear compressed. However, when it comes to NNN properties because the typical price range is between $1 million and $10 million and there are more cash buyers in the market, triple net cap rates are beginning to adjust upward (typically from 4.50 and up), and sellers are starting to negotiate prices down.

Investors who purchase NNN properties typically don’t need to borrow as much or anything at all, and these transactions usually close faster than other CRE, especially with the number of 1031 exchange buyers trying to close their deals on time. These factors are attractive to sellers, so with a bit of nudging, there is some negotiating power, which signals a shift to a buyers’ market.

NNN Sale-Leasebacks Continue to be Valuable Steady Investments

Throughout the year, sale-leaseback properties have come on strong with NNN buyers, and they continue their popularity due to the win-win nature for the business owner/seller and the triple net lease investor. Sale-leasebacks are expected to increase as business owners seek operating capital without borrowing at high interest rates. Leasebacks are also a reliable choice for investors who want to fulfill the 1031 exchange requirements.

“Business owners and corporations see the increased interest from sale-leaseback buyers and their available capital as an opportunity to cash in and expand their businesses while not losing value. Real estate investors are turning to leasebacks for long-term stability and profitability,” said Vince Vatterott, Westwood Net Lease Advisor.

Sale-leaseback properties are known for being stable NNN investments that typically provide above-market yields. They carry less risk than gross lease properties, and usually offer slightly higher cap rates (currently 6.00–8.00%) than other NNN properties.

Future NNN Market: Hear from Westwood Net Lease Advisors’ President, Chris Schellin

What Will the Triple Net Lease Market Offer in the Next Year?

“This is a tough time to predict what any market will do. However, the triple net lease market has been strong and remained strong through tough economic times — even the pandemic. Triple nets, like Dollar General, 7-Eleven, Starbucks, Taco Bell, Walgreens, and their counterparts, have adapted with omnichannel delivery and AI technology and found a way to keep prices reasonable for customers, even in an inflationary environment, which is contributing to growth. These essential retailers and businesses are in better shape to handle any type of economy. Consumers are also frequenting lower-cost retailers as the purse strings tighten. This allows major brands to continue to build and add locations,” Schellin said.

What About NNN Financing Versus All Cash?

“Some net lease investors, especially those seeking financing, are becoming more discerning, waiting to see if interest rates show any signs of leveling off, and gauging whether underwriters will loosen the strings on loan to value (LTV) requirements. Investors not utilizing the 1031 exchange are sitting on the sidelines, creating more supply and giving 1031 investors a leg up on the competition,” Schellin explained.

Is the NNN Market Changing in any Notable Ways?

“Nobody knows what the next 12 to 18 months will bring, but Westwood Net Lease Advisors expects the appeal of NNN properties to remain. What’s notable is that we see new buyer types entering the market. There are investors approaching 80 years of age who can’t wait for the stock market to rebound, so they’re cashing in and purchasing triple net lease properties for the stability and the ability to leave a profitable portfolio to their heirs. We are also helping younger, career-driven people purchase triple net properties for long-term peace of mind and extra income. The triple net market is one we feel will continue to offer investors stability in any economy. The key to a great investment is for buyers to know their risk tolerance and buy appropriately,” Schellin said.

To Wrap it Up — Steady NNN Lease Properties Offer Stability in an Unpredictable Economy

Over the next year, the net-lease market is projected to shift toward a more buyer-friendly market with cap rate increases and price negotiations. Major brands are planning to add new services and locations, and sale-leasebacks are growing in popularity. In any economy, steady NNN lease properties will continue to be a low-risk, financially strong investment option.

Contact Us for a No-Obligation Conversation

Whether you’re a savvy investor or just entering the triple net lease market, by no means is it too late to get a great deal on a NNN lease property. Our advisors are here to help you purchase your ideal NNN investment, from before the property search through closing and thereafter, at no cost to you.  Contact our team today for a no-obligation conversation about your triple net and sale-leaseback investment options. 314-997-5227

Resources: 1. WealthManagement.com

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