January 2, 2014

With low retail development and low interest rates investors have been hungry to get their hands on single tenant net lease properties. Factor in No management responsibilities, attractive price range and stable cash flow, no wonder why Institutional investors are buying them in huge volume.

Real Capital Analytics reported that single tenant net lease retail investment volume was up 28 percent in 2012 to $9.625 billion. The segment’s average price per square foot of $239 led the pack with “U.S. Mall & Other” a close second at $237 per square foot.

Investors remain focused on high quality, credit rated tenants like Walgreens, Walmart and Home Depot but find a number of quality retailers (LA Fitness, Hobby Lobby) that aren’t rated but have strong financials and operations that make them also a good buy.

With the high demand, smaller net lease investors tend to look for deals in other locations along with altering lease-length and credit rating purchase parameters. For example, an individual investor may target a tertiary market where a retailer of lesser credit quality has a shorter lease term of 7 to 10 years. Stable opportunities do exist and not every investor is always seeking the huge big box retailer in a major market. Investors are making great returns with dollar stores like Dollar General and Family Dollar, which generally offer longer lease terms and higher yields. They are typically located in urban and suburban area but make up for it with high credit rating, strong financial performance and corporate guaranteed leases. The demand is there and it shows in statistics. According to RBC Capital Markets, U.S. demand for retail space hit a 5 year peak at the close of 2012 and climbing.The retailers planning the most new stores are, in order, Subway, Dollar General, Five Guys and Family Dollar.

“These retailers are among the highest cap rates in our universe,” a senior commercial real estate researcher told SCB. “Dollar stores are trading between cap rates of 7.7 percent and 8.3 percent, depending on the deal.”

Masam Abbas of The Motley Fool Blog Network expounded on the investment upside of Dollar General, the largest small-box discounter with more than 10,000 stores across 40 states. It all starts with “the ability to sell basic items at good values in highly convenient locations, which is driving same-store sales.” The basic, discounted product lines mean that Dollar General weathers recessionary times well as customers pinching pennies in lean times will still shop in its stores. “It has demonstrated the ability to open more than 600 new stores a year even as its returns improve steadily,” Abbas added.

To learn about purchasing a NNN Single tenant net lease property with your 1031 exchange read more articles and resources in our 1031 exchange section or contact us directly.

About the author 

Dwaine Clarke

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