Single tenant net lease properties are great properties to own for investors who want investments that require no management and operations costs. The net lease and sale/leaseback markets has been hot but with rising interest rates, Obamacare and debt-ceiling issues it has created uncertainty for investors.
Investors are looking for safe investments with comfortable yields in a uncertain environment. The most popular and safest are national credit tenants on long-term leases, which also lead to a strong sales volume in the sector. Among those, Dollar stores (Dollar General, Family Dollar), Drug Stores (CVS, Walgreens) and quick service restaurants (McDonald’s, Applebees’s, and others) has all experienced an increase in sales during the past 12 months.
For Drug stores sales jumped 10 percent, dollar stores, 23 percent and quick service restaurants 40 percent.
“Over the next 18 months, we anticipate $15 billion in new product hitting the market,” said Geoffrey Linden, vice president of acquisitions for Agree Realty Corp. Although supply isn’t as robust as it was in 2006, new, high-quality product coming online means single tenant net lease properties should continue to be a popular investment, he added.
Lower Cap Rates, Shorter Lease terms
Investors in all sectors are changing their investment strategies up and grabbing properties with lower cap rates and lower lease terms. The different between a 10-year lease for a credit rated tenant and a 15-year credit rating tenant could be as little as a percentage point for the same tenant. Local and experienced investors that understand the market well are buying these short-term lease deals. Understanding the tenant and gauging the renewal risks and the risks of the tenant actually moving is key. Understanding rental value, competing sites and market dynamics are key to understanding the renewal decisions these tenants consider.
Financing is readily available and abundant
Financing is also readily available and a great way to leverage out cash and risk. There is unsecured debt market along with secured debt market and mortgage financing which are all readily available. There is also an an abundance of non-recourse financing available
The current low interest rates certainly help make single tenant properties an attractive investment. Depending on the tenant, guarantee, lease term and location, financing is available as of today at rates as low as 4% for up to 70 percent of the purchase price. If you acquire a dollar store at a 7% cap rate, the effect from the positive leverage of 300 basis points on the debt portion will increase returns dramatically.
Interest rates effect on Cap rates
Cap rates have continued to fall, especially for triple net, 15-year leases, Cap rates depend on a variety of factors, including the kind of tenant, lease terms, location and demographics. Auto parts stores tend to have cap rates between 6 and 7 percent, while drug stores are lower at 5 to 6 percent, she added. Dollar stores fall in the middle at around 6.5 to 7 percent. Even with the uncertainty, investors still enjoy the safety single tenant net lease properties provide.
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