There have been many dire predictions over the years about the extinction of physical retail stores, and when Covid-19 hit in 2020, the consensus was that it was over for brick and mortar. But is this true?
In this article, we’ll examine:
- The Covid-19 effect on the retail industry
- The future of retail as the pandemic wanes
- If the latest economic challenges will impact your commercial real estate and triple net (NNN) investment strategy
Covid’s Effect on the Retail Industry
At the beginning of Covid-19, when everything began shutting down, retail stores, fast-food restaurants, and others in the retail industry were hit hard by closures, staffing issues, and supply chain trouble. The government then created the “essential” classification for certain types of businesses so they could re-open. Most of the essential retailers also happened to be triple net lease tenants.
The obstacle of providing contactless products and services in brick and mortar retail locations, along with staffing and supply shortages, created an urgency to quickly develop and adopt “futuristic” technology and programs to:
- Provide touch-free or minimal-contact products and services, easily.
- Establish omnichannel shopping with services like BOPIS (buy online, pickup in-store), curbside pickup, app ordering, kiosk pickup, at-home delivery, express drive-thru lanes, etc.
- Deliver convenience by adding products and services that went beyond normal offerings.
- Expand their customer base.
- Develop a safe working environment with additional benefits for staff.
- Work around supply chain availability with better inventory management and fulfillment. Some retailers have become their own warehouse distribution companies (Dollar General, for example).
What could’ve been a permanent negative impact of Covid-19 on the retail industry turned out to be a mostly positive outcome due to retailers’ forward-thinking, resilience, and ability to adapt, all while keeping the customer experience and employee safety in the forefront.
Covid Impact on NNN Investments
During the height of Covid-19, essential businesses like dollar stores, fast-food restaurants, QSRs, auto parts stores, drug stores, and gas station/convenience stores began to evolve and grow and meet the unique needs of their customers, which also generated new NNN investor opportunities.
Financial institutions began lending again later in 2020 for the investment-grade NNN properties they felt would generate solid, long-term, reliable returns for their mortgage holders, and the demand for triple net properties skyrocketed to a level not seen before.
The Current State of the Retail Industry: End of Q1 2022
Operating through the pandemic, the Great Resignation, and an inflationary economy has made many retailers stronger.
The US Census Bureau reports that the retail sector had already recovered to pre-pandemic levels by Q3 2021. “In October, the retail sector — which includes consumer-facing businesses including stores, restaurants, and gas stations — made $553 billion in sales. That’s about 5% higher than the $527 billion in sales in February and 34% higher than the $413 billion sold in April [2021],” writes USAFacts.org.
According to the US Census Bureau’s January 2022 Advance Monthly Sales Report, retail trade sales were up 4.4 percent (±0.4 percent) from December 2021, and up 11.4 percent (±0.7 percent) above last year. Gasoline stations were up 33.4 percent (±1.8 percent) from January 2021, while food services and drinking places were up 27.0 percent (±4.4 percent) from last year.
Consumers now know how important their favorite brands are to their daily lives and realize that they do need physical shopping experiences. In effect, new research from Forrester shows 72 percent of U.S. retail sales will still occur in brick and mortar stores into 2024.
“An evolving marketplace, user-friendly technology, and triple net investors who buy and sell new and existing essential retailers are helping us and our favorite brands move toward a more stable post-pandemic era,” said Chris Schellin, President, Westwood Net Lease Advisors.
The Current State of the Covid NNN Investment Market: Q1 2022
Are NNN properties still a strong, reliable investment class in a post-pandemic, inflationary economy? They are. And in most cases, much more so than multi-tenant, gross-lease properties, such as apartment complexes and office buildings, as they have had large swings in vacancies, rent abatements, and maintenance supply issues.
NNN Dollar General, Taco Bell, Starbucks, KFC, Firestone, Auto Zone, Walgreens, Mountain Express Gas & C-store, 7-Eleven, and many other high-credit, triple net tenants have not just survived the pandemic, they’re thriving.
A stable, income-producing NNN property is a worry-free investment and a dependable source of guaranteed monthly income for 10–15 years or more, no matter what the economy is facing.
- When interest rates rise, NNN investments typically garner better mortgage interest rates than gross lease or residential rental properties. Early in the pandemic, when lenders were not issuing loans for most CRE, our clients continued to close deals with favorable interest rates.
- Historically, when inflation slows the economy, consumers’ demand for low-cost, essential goods typically increases, projecting growth for the very properties we’re talking about.
Now that most major brands have weathered a never-before-experienced pandemic and come out on the other side more efficient, and in many cases, more profitable, the benefits of NNN investing are clear.
No other investment type offers responsibility-free, recession-proof, pandemic-proof monthly income that’s guaranteed for 10–15 years, and a potential internal rate of return (7–10%) that’s comparable to other types of investments, without fluctuating daily value or hands-on management.
To Wrap it Up – Retail Industry Covid Impact
Many find it hard to remember doing business pre-Covid and the experts say we’re not likely to return to that type of commerce. Technology has come too far and our buying habits have changed so much (think ordering through an app and curbside pickup) that we’re only going to improve upon what has been the biggest change to business in our lifetime.
The unforeseen impact of Covid on the retail industry has, in many ways, been a boon to brick and mortar stores. In the long run, it has bolstered customer loyalty and helped triple net lease businesses become better at what they do. Analysts predict, in the face of living with Covid-19, inflation, and economic uncertainty, parts of the retail industry will still manage to grow.
Companies such as Dollar General, 7-Eleven, and Taco Bell have no plans to stop adding stores, products, and services, and look to their real estate investors to keep expanding.
No-Obligation NNN Investing Conversation
No-Obligation NNN Investing ConversationIf you’re interested in NNN investing, be sure to connect with a Westwood buyer’s advisor right away. Demand is high and many properties are selling before they are listed on the open market, which is why we review the marketplace daily and connect with colleagues to find our clients off-market, the most recently listed, and developing properties.
We are here to represent you and guide you in every step of the triple net buying and 1031 exchange process – from the property search through closing – all at no charge to you. Contact us today for your no-obligation, free conversation, 314-997-5227.
