Note that NNN industrial and medical office are attracting the most capital and attention. Meanwhile, C-store/drug stores are stable. The two sectors that are expected to lag are automotive and fitness. There is huge demand for restaurants still, odd that it may seem, and plenty of investment opportunities with national tenants such as Burger King, McDonald’s, Chic-Fil-A, Burger King, Dairy Queen, etc., remaining a growth proposition. For many net lease investors, excellent tenant credit remains a core factor together with the quality of the underlying asset.
Industrial net lease investments are certainly highly active thanks to e-commerce, while dialysis clinics and medical clinics and urgent care centers are experiencing blazing demand. On the retail front, investor demand has softened for storefronts that are endangered by Amazon or other online competition. Other net lease NNN property types that remain solid are grocery and pet supplies.
Any high credit and market-savvy, responsive, national, tenants are still a favorite with net lease NNN investors. At the same time, triple net lease investors continue to spotlight unit-level performance and weigh this factor very heavily in their deal underwriting.
Low interest rates also spark for what could be another strong year of sales ahead for triple net NNN investment sales. One trend that is particularly evident is the popularity of sale-leasebacks. The NNN triple net investment property market is witnessing an increase in demand, from multi-family sales and 1031 exchanges. The supply of net lease will remain strong, particularly in the industrial, medical and retail categories. This strong supply is coming from existing, older properties and, new, speculative builds. In retail, for example, there has been an increase in build-to-suit activity that is dominated by dollar stores, grocery stores, fast, casual, and QSR restaurants.
The biggest factor impacting the pandemic NNN market has been the drop in interest rates. For example, single-tenant NNN sales volume increased 15 percent to $82 billion by late 2020, which represents a new high, after 2008. The interest rate environment is favorable for the net lease sector, and investors are looking ahead to a supportive Yellen-led, Fed policy. This said, NNN deal flow could be more aggressive in the first half of 2021, with sellers looking to bring properties to market early to take advantage of low rates and manage the uncertainty from the change in presidency.
There has been a spike in demand for all manner of NNN net lease triple net property types from 1031 exchange buyers and multi-family sellers since 2019 as investors continue to seek lower-management-intensive investment properties. It is very encouraging to see a slew of small, non-1031 exchange investors, and foreign investors entering the U.S. NNN net lease market, taking advantage of the low interest rate environment and seeking the multi-layered, generational, benefits of investing in NNN properties.
It should be clear that the biggest opportunities ahead in net lease in the coming five years, lie in the ability of triple net NNN investors to redevelop and reposition distressed properties, as well as acquire properties with short-to-medium term leases. However, with a lot of dry powder on the sidelines, poised to deploy, deals in net lease NNN will not come cheap and cap-rates thus will remain compressed for a while.