As we progress through the New Year, it pays to take a look at how this year’s commercial real estate trends are likely to affect the industry. The Triple Net market is a stable one, but changes do occur. Some of these changes are affecting NNN investment properties- in a positive way if you are a smart investor.
1. Changing Demographics
The Baby Boomer generation dominated the country for quite some time. However, as time passes the Millennial generation is now officially the largest generation. This increase brings about changing demographics and behaviors.
These changes affect commercial real estate and even NNN investment properties. Millennials spending habits, school debt, and general reluctance to purchase property impacts the commercial real estate industry. Many Millennials have significant student loans and are putting off major life decisions, such as buying a house, getting married, or having children.
2. Changing Spending Habits
If you are an investor with retail properties, then it is critical you understand changing spending habits.
In general, Millennials are not impulse buyers. They deliberate longer before they purchase an item. They spend more time online doing research, checking reviews to ascertain product quality, and getting feedback from those they know.
Even more importantly, they want to absolutely make sure they get the best deal. Many will even delay purchasing a product until it goes on sale. However, people are increasingly likely to make a large purchase of $500 or more if they see the value.
For example, 81% of Millennials said they made a purchase of $500 or more, while only 61% of Baby Boomers said the same thing. This means that Millennials don’t mind spending, as long as they can see the value in what they are purchasing. For most Millennials, “value” doesn’t just mean price; it also means trading assets for an experience, such as an extreme vacation.
Thus, retail owners should make sure to keep in mind that the sales cycle for Millennials may be longer and more comprehensive than for other age groups. Businesses will need to spend time wooing this age group, and connecting with them on a one-to-one level, because in addition to being online 24/7, Millennials want to have a relationship with brands.
Despite these factors, Baby Boomers are not as different from Millennials in terms of their lifestyle choices. Both groups are gravitating towards urban areas (although some older Millennials have started moving to the suburbs to establish families), and both are increasingly searching out “lifestyle” apartments that allow them to enjoy various amenities.
These lifestyle and spending changes are all important considerations for investors interested in purchasing retail properties, relying solely on a company’s past history may not paint the full picture during due diligence. An evaluation of the business’s future positioning, both in terms of competition with e-commerce companies and with regards to their target market, is recommended.
3. Wages Are Stagnant, And Consumer Debt Is Still Going Up
In 2017, consumers averaged higher credit scores and higher debt – a contradiction that shows the complexities of American’s relationship with debt.
Overall, the economy shows significant signs of improvement. Housing prices and foreclosure rates return to normal, and the unemployment rate is at its lowest in years. Consumer confidence hit a 17-year high, and the average credit score – 675 – is the highest it’s been since 2012.
On the other hand, wages are still as flat as ever and consumer borrowing rose 8.8% higher than its been in the last two years. These facts hit the retail industry hard, with new store closings announced every day.
However, the retail landscape overall continues to thrive in other industries. Retailers that provide unique experiences to engage consumers and create brand loyalty find increasing success. Other companies providing great deals show signs of continued success as well. This is an important consideration when investing in commercial real estate NNN investment properties.
4. Too Much Retail Space
The amount of retail space per American is higher than anywhere in the U.S. with around 25 square feet per person, yet not all of it is used. As a result, some retailers need to downsize. Many investor owners work to implement ways to use this extra retail space in creative ways.
Single tenant NNN investment properties enable you to specifically investigate the use of the space and understand the future of the lessee’s business so that you can make sound decisions based on their financial viability, the property’s yield, and your investment goals.
Mixed-use projects demonstrate only one example of adaptive re-use of space. Other investors turned to unique uses for empty retail space, such as pop-up stores, indoor climbing zones, fitness centers, supermarkets, or experiential restaurants.
5 . Health Care Will Continue To Affect CRE
As Baby Boomers continue to age, medical services evolve in order to meet their growing needs. More medical centers continue to open in order to deliver care.
Many types of elder care facilities show an increase in demand, including assisted living facilities, retirement centers, or specialized facilities such as memory care units. These types of investment properties require experience; however, some investors will hire a management company to take over the bulk of the work.
Many investors do consider the extra effort worth it. Medical buildings are fast becoming a lucrative industry, with strong tenant retention (physicians don’t want to move away from their patient base), stable cash flow, and overall excellent long-term value. This makes the medical industry a key sector to look at when assessing opportunities for NNN investment properties.
To Wrap It Up
As time passes business and lifestyle change occur, especially from generation to generation. Different spending habits, living situations, and preferences affect business which in turn has an impact on commercial real estate. Understanding these changes in regards to NNN investment properties makes for a savvy investor.
Get in touch with one of our advisors to learn more.