Triple Net Lease, A (Not So) Well-Kept Investment Secret

Net lease real estate, aka triple net lease (NNN), is a $68.1 billion dollar industry that is growing 16.2% year-over-year according to Real Capital Analytics. This sector includes office, retail and industrial properties. Yet this industry has remained a fairly well-kept secret – even while providing outsized returns for years. Although you may not be aware of the NNN industry itself, you know these assets well. Net lease properties might include your neighborhood pharmacy (Walgreens), local convenience store (7-Eleven), nearby discount store (Dollar General), nearest child daycare (KinderCare), and a multitude of fast food restaurants that include the likes of Burger King, KFC, and Taco Bell among others. Net lease properties are indeed all around you and an integral part of your daily life.

Often referred to as a “bond wrapped in real estate” the average yield, or cap rate, for net lease asset transactions has been relatively stable at an average of 6.2% over the last 5 years. This is quite attractive compared to the lack of favorable fixed-income yields in the low interest environment that has persisted over the same period. The predictable, steady income nature of net lease, often backed by the tenant’s corporate guarantee to pay the lease in case of default, presents a compelling value proposition for 1031 Exchange buyers and/or those that seek to diversify their real estate or stock holdings. The participation from private investors is also significant. According to JLL, private investors represented 42.5% of net lease acquisition volume in 2018, up from 35.4% in 2017.

The question is how net lease retail properties will hold up during the current global Covid-19 crisis? The quick answer is that it depends on the retail category. While movie theatres, gyms, and to a certain extent quick-service-restaurants may be struggling due to the prolonged shutdown, those retailers that are in the “essential” retail category are thriving. These include Walgreens, CVS, Dollar General, and just about every retailer in the grocery business from Albertson’s and Trader Joe’s to Whole Foods.

Lately, net lease investors have been flocking even more heavily toward “flight to safety” assets such as Dollar General (S&P:DG). This is a high-performing retailer that has been a darling to investors both in the financial world and real estate market with an average cap rate up to 7%+ on long-term leases. Dollar General has opened an average of 1,063 new stores in each of the past 3 years, and investors can invest in these buildings on long-term 15-year NNN leases. According to Costar, the Dollar General real estate investment picture is robust with over 348 transactions registered in the U.S. this year alone from March through June even in the midst of the Covid-19 healthcare and economic crisis.

While some investors may be hesitant to invest during the Covid-19 crisis, within the net lease retail sector there are outstanding performers worthy of consideration. Whether you are a seasoned real estate investor or just getting started, it may be advantageous to explore whether NNN investment could be an ideal fit for your financial and lifestyle objectives. Please contact Andrew Vu at 415-539-1120 for a complimentary strategy consultation.