NNN Medical Properties
Regardless of the strong demand from investors, NNN medical properties were priced at a discount to the overall net lease market while NNN bank properties have stagnated. This is due to the limited number of investment grade tenants in the medical sector. Only 33% of the medical property sector supply is leased to investment grade rated tenants. Because in the medical sector, consumers and service providers meet in person, this sector is still largely e-commerce resistant. Over the last 3 years, the supply of single tenant medical properties increased by more than 22%.
Cap rates remain stable at 6.50% when compared to 2015. The supply of net lease medical properties continues to grow as big groups and systems acquire smaller healthcare providers and one-off physician groups.
One of the most attractive aspects of NNN medical leases is the presence of strong rental escalations throughout the term giving investors an inflationary edge. The sector’s resistance to e-commerce and the country’s aging demographic will keep investor demand sky-high.
The single tenant medical sector continues to be in demand with private and institutional investors. However, private investors are more drawn to credit backed tenants (i.e. Fresenius and hospital system backed leases). Institutional investors are more actively pursuing properties where leases are backed by physician groups which allow for higher cap rates.
Statistics of Note: Average cap rates for specific types of NNN medical leases are: General Doctor 6.9% Urgent Care 7.4%, Dialysis 6.3%. Generally speaking the market compresses cap rates as remaining lease terms get longer or shorter by upto 1%!
NNN Bank Properties
Now, the bank NNN lease sector is comprised of both national and regional banks. Transaction volume for retail NNN bank branches has been decreasing. This can be primarily attributed to declining future need of brick and mortar banks. The typical NNN investor prefers longer term leases which in turn has lowered the demand for NNN bank lease due their tendency towards short-term leases. Historically, NNN bank ground leases saw a 2.5-3% premium over the general NNN retail market. Currently, the premium has compressed to 1%!
Cap rates for NNN bank leases are hovering around 5.5%, currently, and have been increasing versus the broad NNN retail lease market.
Investor demand for bank ground leases is quirky and inconsistent. However, the general market expectation is that interest in bank ground leases is lower than other NNN sectors. Investor risk perceptions include high rent comps and real estate repurpose challenges. Bank are not growing branches, causing the supply of assets to be saturated with old NNN leases.
Statistics of Note: With an average price of about $4.0MM (4.8% cap rate), prices for investor favorite NNN bank ground leases are as follows: TD Bank $6.4MM (5.0% cap) Chase Bank $4.4MM (5.0% cap) Bank of America $4.0MM (4.5% cap) and PNC Bank $2.6MM (4.5% cap).
When considering investing in NNN leases, it isn’t as easy as calling a stock broker to buy stocks or mutual funds. NNN leases have nuance and complexity, and yet offer risk-adjusted returns that are unparalleled in the investment world. Contact your trusted experts at The Triple Net Investment Group to get solid advice on your next step with buying or selling a NNN lease, and get access to the best deals in the nation.
