2Q 2020 Market Report: Net Lease in Certain Sectors Remains Strong Despite COVID-19 Uncertainty

7/23/20

SRS Real Estate Partners’ National Net Lease Group released its 2Q 2020 Net Lease Market Overview. An important highlight from the 2Q 2020 report is that investor activity in the net lease space has remained strong for necessity-based uses, publicly-traded companies with strong financial positions, and uses such as quick-service restaurants (QSR) with drive-thrus.

Since the COVID-19 crisis began, SRS’ National Net Lease Group (NNLG) has closed 140 transactions valued at $502 million. Additionally, the group has nearly $800 million of assets under LOI or in escrow and $2 billion in assets currently listed for sale.

According to SRS National Net Lease Group Managing Principal Matthew Mousavi, “The continued interest we are seeing in net lease and what makes it a strong investment option are due to some of the same fundamentals exhibited during the Great Recession. Being that single tenant assets have lower price points compared to large multi-tenant centers, the majority of net lease buyers and owners consist of small private investors or groups seeking yield and are attracted to owning a tangible asset.”

For the report, SRS reviewed Q1 and Q2 2020 sales for the following sectors: Automotive, Bank, Big Box, Casual Dining, C-Store/Gas, Dollar Stores, Educational, Fast Casual, Grocery, General Retail, Medical STNL, Pharmacy, and QSR. It’s especially important to understand the impact the ongoing pandemic has had on the relationship between length of lease term and capitalization rates across all product types, as well as how the pandemic has affected buyer bias toward certain sectors.

Sectors proving their resilience include:

Grocery: Investors continue to look at this sector for stable cash flows. The average cap rate has dropped by 48 basis points, which perhaps can be explained by a combination of 1) increased demand for these safe assets and 2) a majority of grocery stores are comprised of strong, high credit grocers.

Pharmacy: Average cap rates for pharmacy net lease compressed by 25 basis points. This was attributed in part to the longer average lease term, as well as the broad “flight to quality” due to the pandemic.

Convenience: The C-Store/Gas Station space remained a very active sector of net lease as it exemplifies internet resistant as well as being labeled essential. Cap rates expanded by just 8 basis points due largely to the geographic location of the properties transacting during Q2 vs Q1.

Sectors of concern include:

Big Box: the big box sector within net lease has seen diminished activity for numerous quarters, pressured by online competition.

Casual Dining: Casual dining net lease was heavily affected by COVID-19 with most transaction occurring early in Q2 likely originated pre-COVID. While cap rates compressed Q2 vs. Q1 this is due to transactions occurring in primary markets only, with higher quality tenants.

About SRS Real Estate Partners

SRS Real Estate Partners is the largest real estate company in North America exclusively dedicated to retail services. Headquartered in Dallas with more than 25 offices worldwide, SRS’ strong reach and international presence provide the company with unparalleled knowledge both globally and domestically. As a result, clients of SRS have a competitive edge through a full range of offerings including brokerage services, corporate services, development services, and investment services. Since its inception in 1986, SRS has built a strong foundation in the retail real estate world and grown into one of the industry’s most influential and respected leaders. Our success is measured in the achievement of our clients’ objectives, satisfaction and trust. For more information, please visit www.srsre.com.

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