Investment in Net Lease Properties Expected to Carry Greater Risk as Pandemic Persists
Investors are expected to view net lease properties as generally riskier this year as the coronavirus pandemic squeezes the U.S. economy without a clear end in sight, according to a new poll.
Commercial real estate professionals said they expect capitalization rates, which define the annual return on investment, to rise this year, Wilmette, Illinois-based net lease brokerage firm The Boulder Group found with a survey it did through LinkedIn.
Of the 222 respondents, 43% said they expect cap rates to rise one to 19 basis points, or .01% to .19%. Another 37% thought rates would go higher still.
Cap rates are a factor in setting the price for net lease properties, which are usually filled with a single tenant that pays most if not all of the property’s operating expenses. A landlord collects a rent check and earns a return on investment along the way, hoping that the tenant is solid and stays in business or continues to lease the property.
A higher cap rate reflects greater risk the tenant leaves, either through closing shop or not renewing the lease. Rising cap rates mean falling prices on properties.
Randy Blankstein, The Boulder Group’s president, said investors want a premium when there’s a lot of uncertainty. Still, there are hot properties.
“Now, only the best things are trading,” he said. “Any quick service restaurant with a drive-thru is in demand.”
Restaurants could continue to operate during the lockdowns as long as the dining room was closed and they made deliveries to diners or had a drive-thru. The drive-thru put chains such as McDonald’s and Chick-fil-A in a better position than those that had to figure out delivery. That has left casual dining restaurants behind.
Investors also have shifted toward properties with tenants that were deemed essential during lockdowns and could stay open. Those included grocery stores and pharmacies.
An investor group managed by Boston-based Eaton Vance scored one of the biggest net lease deals during the pandemic in May when it paid $70.9 million for a property in Chicago leased to Whole Foods with a 4.15% cap rate, according to CoStar data.
Net lease properties continued to trade hands during the pandemic while sales generally became sluggish.
In a separate LinkedIn survey by The Boulder Group, 57% of the respondents said transactions could be down this year by as much as 29% or as little as 1%.
