Why Flight to Stability is Fueling STNL Investment

April 21, 2021

The turbulent year that was 2020 sent many commercial real estate investors turning to more stable, secure investments. And that led many to single-tenant net-leased (STNL) properties, says El Warner. The Colliers EVP spoke to GlobeSt.com about this investment trend and more findings from the company’s Single Tenant Net Lease Report 2020.

“Throughout the pandemic and economic uncertainty of 2020, many STNL properties thrived, including grocery stores, drugstores, auto, discount, sporting goods, and drive-through fast food restaurants,” Warner said. “And with the success of these retailers and their respective increased sales volumes, the asset class continued to see significant demand.”

The STNL sector has always offered many investment advantages, including low entry costs, predictable and long-term cash flow, and minimal landlord responsibilities. Add to those the fact that many tenant types were deemed essential businesses during the pandemic, reflecting inelastic customer demand for their products and services. That reality further supported the stable STNL cash flow on the investor end.

“Transaction velocity decreased in 2020 due to a lack of supply in the market, not because of demand,” said Warner, who noted Coresight Research’s forecast that store openings in 2021 will outpace store closures. “We could not get enough STNL inventory fast enough.”

As with any asset class, some products carry more risk than others. Investors still should be prudent in evaluating a tenant’s sales volume, its debt and health ratios, and the current rent relative to the market rate. Warner noted that gyms and movie theatres were hit hard by closures and pandemic restrictions, but smaller format theatres are showing promise as many businesses reopen across the country. Also, new STNL stores are incorporating more convenient and safety-oriented features, including drive-through windows and curbside pickup areas.

Cap rates, which have remained stable for many STNL products during the pandemic, price in the risk associated with the asset, from a well-located pharmacy with a major credit tenant to one of the aforementioned distressed property types. However, Warner reports arbitrage opportunities between the tenants yield to maturity in the bond markets versus the 100 to 150 bps premium for brick-and-mortar retail.

“That is a big gap and will continue to be a driving force in the capital flow to this investment vehicle,” Warner said. “We are going to continue to see growing demand for STNL properties, an asset class that gives an independently unique return with little to no management.”

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