Should You Still Consider Single Tenant NNN as an Investment?
In recent years, Single Tenant Triple Net Leased (STNL) investments have become very popular investments. This was partially due to higher yields and relatively lower risk associated with alternative investments, whether in the bond/mutual fund market, or other types of real estate. These types of investments are characterized by longer lease terms typically between 10-20 years, with options for the tenant to stay at the location for another 10-20 years. This, as well as stable positive cash flow from commercial (and sometimes credit rated) tenants, coupled with ease of management has increased their popularity. Usually all maintenance, repairs and bills, including taxes and insurance, are coordinated and paid for by the tenant, making for an easier to manage asset.
Due to this, we have seen many investors in recent years who either lack time, commercial real estate experience or are just tired of having money not earning any interest enter into this market. Of course, like anything else, as demand goes up, typically so does the price. In fact over the last three to four years, we have seen a compression in the capitalization rates of almost 200 basis points in many areas. Which brings to mind, what will happen as interest rates, and therefore, other competing investments offer more favorable returns.
Economic uncertainty earlier in the year, coupled with tightening lending standards, poor retail news, bankruptcies/store closures and the uncertainty of the political climate have certainly impacted the retail investment market, but due to the tenancy nature (many are considered recession proof, i.e.: fast food, drug stores, specialty medical and grocery stores) of many of the STNL tenants this market has remained relatively strong, especially in submarkets such as Southern California.
What is driving the strength in these markets? Well, STNL investments are definitely considered one of the safer and one of the most liquid forms of real estate investments. Additionally, and one of the key factors, is still the law of supply and demand. We’ve already talked about demand, the other factor is supply, and in in-fill areas such as Southern California and especially coastal communities, supply is limited, therefore keeping upward pressure on pricing. Will this change in the near future? I don’t really see it changing quickly in the immediate future, and it will probably be impacted slower than other asset classes with a downturn in the economy. With the longer term leases in place & set increases in rental rates, an investor will know going into a purchase of a STNL what they can expect as a return if we do see another 4-7 year downturn.