Hot STNL Market: Forecast and Tips for Single Tenant Net Lease Properties

[Music] welcome to america's commercial real estate show your source for market intel forecasts and strategies hello i'm michael bull thank you for being with us this segment is brought to you by commercialagentsuccess.com you can cloud access 21 one hour sessions and get them online anytime anywhere learn more at commercialagentsuccess.com well today we're going to talk about the single tenant netlis investment market look it's been one of the sectors that's always been really interesting to to new investors looking for sort of hands-off investments and also for very experienced investors especially those who are maybe in their latter years and looking for something to trade into that safer that's more hands-off and so there's a lot of benefits and then when you look at the market we've been in you know the single tenant net lease market seems to even heat up more in times of volatility uh and and as everyone knows these are typically high credit tenants of free standing buildings that start with very long-term leases tenants pay all or most all the operating expenses so so they're very hand-off hands-off and very predictable you know the tenants include banks drug stores other auto related businesses fast food retail office industrial some cases restaurants so there's a lot of tenants to think about out there and the default rates on single tenant credit properties are just really really low which makes it a very interesting market and so let's see what's going on in the market and get some tips from an expert please welcome nancy miller nancy is a partner with bull realty she's president of the net lease investment group now she's a very active advisor in the netley space she's been doing it for 20 years nancy thanks for joining us thank you michael thanks for having me well nancy uh here we are it's august 2021 and hopefully the pandemics on it's on its way out we'll see the commercial investment market has really heated up in most all sectors what are you seeing in the net lease sector well michael you mentioned i've been at this for 20 years and this has been the most incredible time i've never seen such level of activity and volume um in in my whole uh career in commercial real estate that's that's amazing what types of industries and tenants nancy are buyers really looking for today what's most popular well i think the essential businesses that uh you know we hear in the press this is an essential business and so forth your dollar stores your groceries uh different people different types of businesses that people will need to have regardless qsr quick service restaurant fast food the line at the chick-fil-a is enormous etc so that continues to be uh really really popular in this this environment for sure and what are some sample cap rates nancy that you're seeing in this hot market well it depends on uh the tenant but uh i could buy a uh i could buy a uh five percent uh five and a quarter percent dollar store today where two years ago i might have bought it at a six and a half percent for the same cap rate for the same kind of same lease and we're seeing that across the board low fives typically so they're down 50 to 75 basis points lower uh than they would have been pre pandemic for sure and it always depends upon you know the location the tenant and the length of the existing lease so what are some sample closings that that you've had recently the audience might find interesting well we've had more and more people are considering shorter leases because they get a little bit better cap rate but we're having cap rates i just we're closing something this week on a ground lease um that uh hat was a 20-year term it's now 15 years left on it at a four and a half percent cap rate uh we just sold another property that i would have normally in a normal normal time sold probably at about a seven cap rate we're going to sell it at about a six and a quarter cap rate and what tenant in years left unless in that case we've got a 10-year tenant uh we'll have about seven years left on it and uh it would be a dollar store type tenant um and we're we're we just closed on an ilab uh in south georgia that went at full ass price and that was about a five and a quarter and there were six bidders at full price right right yeah yeah you know we just sold a drugstore with a 19-year lease at a five cap and that was the list price and uh not only did it bring list price it had multiple offers absolutely and the buyer paid in the and the buyer paid any and all costs except for the real estate commission right absolutely that really hot market we've also seen some investors buying these really safe uh properties like like banks uh where they're paying these four caps and things but they have long term leases and great locations nancy are there some geographic areas or or states that uh have more demand than others right now yeah the answer is a lot of folks like tax-free states tennessee for example texas and others there are about six or seven tax free states florida of course and they like those we have though people who say i don't care so much about that that's a good thing but i also want something in a robust area so we are seeing a tremendous amount of activity in the carolinas uh in georgia tennessee we're seeing activity in in texas florida alabama and usually in the larger cities um you know south carolina's blowing up between charleston and all the that's going on there chattanooga huntsville there are markets that are just blowing up like crazy and people love those yeah what about industries or uh tenants where you see less demand are there some buyers that will tell you hey you know we don't like these tenants because of the long-term outlook well um another good question because pre-pandemic i wouldn't have answered this but during the pandemic uh we've had tenants that we get pushback on things like swim athletic things that and indoor recreational kinds of things things where there's high contact of people also there's a bit of concern about casual dining as you know it's come back some but part of that is there's an employment issue too there's not enough people staffing those restaurants so those restaurants are not at full capacity and again we hope that the pandemic is settled down because casual dining could be a very good sector we've actually sold this in recent months to applebee's uh great real estate long leases and and so the the investors are our long-term uh feel that that is a good sector but um it will wait and see i don't know if automotive and so forth over time will be a hit or a a an issue uh ultimately with investors as well yeah it's interesting you mentioned automotive uh we've helped some single tenant at least investors place a lot of money recently and they were interested in gas stations and quick glue and and i as an advisor personally just don't think there's a good long-term outlook you know potentially for these businesses and there's safer options out there but wow the market's so hot you seemingly get a great price for anything right now right well you know the the exception to that would be i think the tire world we just sold the mavis tire in the atlanta metro area at a very high cap excuse me at a very high price a low cap rate uh and it had seven years left on it and uh we just are under loi in california for two other tire branded stores that are of a national nature at a five and a quarter cap both of those will have 20-year leases they're in good real estate and they're established as well and there were about five offers on those and i had came with a 1031 buyer who had a lot of cash to put down and and we were able to convince the listing broker that we're the best horse to run with but uh that sector the tire sector whether we go electric or hybrid or stay with gas we need tires on our cars i agree i i like the tower business as well um nancy you you mentioned a 1031 buyer you're working with are any of your clients saying that they're making moves ahead of possible uh changes in capital gains or possible reductions in the 1031. absolutely uh the gentleman that i mentioned that just sold the mavis tire we have two or three properties that we're looking at now to get him under loi he's under lry to close quickly and he's assuming that he is going to also he's putting another property that we sold him um an arby's uh we're putting it on the market very quickly because his goal is to try to get the arby's on the market and get it sold in enough time for him yet to purchase another 10 31 before 12 31 uh 21. yeah so a lot of your clients are saying hey let me do business in 2021 absolutely hopefully i know the rules absolutely and who knows what the real real rules will ultimately be but everyone is driving towards let's get something done by the end of the year this year and i think it's an interesting time in 2021 i think i'd lead a team that sells office buildings and we're seeing the same thing a lot of 1031 money swirling in the market a lot of people want to make moves whether it's geographically or tenant sector property type make some moves now while they know the market is this hot interest rates are low we do have favorable capital gains we have the full 1031 exchange um you know and there's talk of limited to 1031 exchange to 500 000. so when you think about commercial real estate that's basically almost taking it out of the picture i want to ask you nancy about uh lenders today in the single tenant net lease world i assume they they love the space what are you seeing for a sample loan to value ratio and interest rates for some of the loans your buyers are closing on um we've i've gotten a couple quotes in the last several days three and a half to three point nine uh cap rates i excuse me interest rates uh with a ten year balloon uh a 25 or a thirty year amortization and the loan to value is no more than a 65 percent ltv however the but is that the tenant has got to be a strong tenant whether it's a franchise or a corporate or regional tenant um they're looking with some level of scrutiny at the strength of the tenant but very financiable those rates are still pretty good very fast yeah yeah yeah yeah the loan to value right show might some people may think it's a little low you know for a really high credit tenant with a long-term lease at 65 but that's really the highest you're seeing on loan to valuation in in some cases where you have a strong borrower in the same state or in the same city as the lender you might go to a 70 percent maybe if it's a borrower that has a lot of business with that bank maybe the bank will do 75 but across the board if i'm buying something in timbuktu missouri and i want to get financing it's going to be no more than a 65 ultimate yeah and of course some of our clients we can help them with 100 financing if they don't mind also you know putting up their stocks uh for collateral right and really increasing uh returns and building uh wealth well nancy and if investor really likes to hand off asp a hands-off aspect of single tenant and at least they they like the security there's really really low um failures in these tenants but they really want a little bit higher cap rate and these cap rates may seem too low to a lot of the listeners right um and maybe they don't mind the risk of of a shorter lease is how can you help them make make good decisions to kind of weigh that risk on a shorter lease single tenant property uh that's that's a great question and we're asked that question more and more uh the thing to do is number one look at a a quality tenant it may be a regional it may be a franchise it may be a corporate tenant uh look at the fundamental quality of the real estate uh that they're considering buying is it is it have good access good placement you know that type of thing look at all of that and compare that for example there are ways to compare how that property uh in terms of traffic and demographics compares to other properties that might have just sold that have also shorter term leases so we can create a confidence level with that buyer that says hey it only has six years left on will they renew and if we find another similar property over here that has had that they did renew yeah that they did renew it it could show them so there's some ways to kind of safeguard a decision but by and large and you can look at store sales if they're reported you could look at the rent to sales ratio and if the rent-to-sales ratio is lower be it below 10 or 9 chances are it's a very profitable location for the uh tenant and there's no way that they're going to you know move or close the store and not renew so that those are some indicators i like that i mean there's sophisticated tools you have today to sure to really figure out even if they don't report sales how much traffic are they getting and what is that traffic how does it compare to stores that you know are doing well so you can really gauge the risk better today than ever before you don't have to sit out there and count cards right and unlike what you said you look at the downside risk right if that tenant does not renew what's the real estate like right what's that worth and what do you have if that tenant doesn't renew that's right and that's you know a key key thing and it could be in a small town not necessarily a big town it can still be good real estate it could be in a college town state capitol it could be in in podunk but if it's the crossroads and it has high traffic counts and it's on a signalized corner i don't care where it is it's still good real estate yeah good point and a lot of the investors really like and like the corporate tenants right what about franchisor tenants should investors consider that there any uh merits to that oh absolutely um we're we have a listing right now it's a bojangles in aitkin south carolina the operator of that bojangles is the largest bojangles operator in the country he owns 92 bojangles operates 92 and during covid he did not ask for one penny of any rent concession so you have strong operators like that and then you have go the other extreme a company called win foods is the largest franchisee of wendy's they're so large they're on the new york stock exchange so what's wrong with that that's right you know so do you get a little higher return if it's a franchisee tenant versus the corporate tenant in a typical time you would but in it but today because again because of the supply and demand if that franchise location is fundamentally good real estate uh i may not see much of a difference at all in cap rate between a corporate and a franchise tenant so long as that we know that that franchisee is solid and they are guaranteeing and and they have backing yeah one of the things that um is interesting about this in lieutenant net lease world is the that that it's really a good investment for first-time buyers right maybe they're a busy doctor lawyer what have you id person and they don't really have the time or maybe even the expertise or experience to manage the property so it's a good investment there and then it seems like it's a great investment for investors who are very expensive been in business a long time and maybe they're trading out of apartments or they're trading out of something that's more risky into these these safe investments what are some tips you would give these buyers who maybe you know haven't bought 20 single tenant net lease properties you know when they're looking and to buy a property what are some tips for them well uh i could give you many all day long but one tip is to work with someone who trades or who knows that specialty a broker who is involved with net lease properties secondly what i would do is if you see something that you like in the market today if i were to show you a property today and you like the fundamentals of that property chances are other people are looking at that property today as well so i would say don't be afraid of making an offer and getting in the game because if you don't i can assure you that if it's that good of a property in three or four days from now in the current market it probably will be spoken for and so i think those are some of the don't be afraid to jump in the pool right away or you'll miss some things and also be creative about you start you talked about shorter leases and you talked about different ways to improve a cap rate don't be afraid to look at those alternative strategies and in the last comment there i have to when i'm looking for things for uh clients if i see something that's in some of the listing uh subscription co-star and this and that and the other if i see it there and or in loop net and you see it there as the buyer chances are everyone else has seen it so i have relationships and i try to go to brokers who i know might specialize with a certain tenant group and i'll say to them i'll say susie or joe or whomever i'll say what's in the pipeline and tell me what's coming up and right now we're we have a a dollar general that we did that very thing because they were out of dollar generals for what this buyer wanted i called the broker who i knew was the market maker there and that broker had something that will be done in october we contracted with them in june for something that won't have a co to be ready to to sell in october so we waited that path and he's doing a 1031 exchange but we waited and we knew where to go to find that yeah and if you're a broker or an investor out there and you're familiar with the brokerage world in the single tenant in that lease world there's really a lot of cooperation between brokers at different companies where you might not see that as much in the multi-family world or office or multi-tenant retail the single tenant at natalie's world do seem seen a lot of cooperation uh which you don't see in other sectors and would you relate the simultaneous net lease investment market today for buyers uh is this a little bit like the sink like the residential home market is it that hot or buyers really need to be very aggressive with their offers yeah absolutely you should come in with your best foot forward or close to your best foot forward and one of the things you have to do is show that you are a capable buyer that you have monies available or you have maybe been pre-qualified if you're going to do financing if you've done it if you're doing a 1031 exchange we always say don't make an offer unless you're what we call your down leg has hard earnest money on it so the property you're selling is the earnest money hard on that because um otherwise the broker we're trying to negotiate with will blow you off and say okay see ya there's a cash buyer over here they're much easier to work with and i don't have all the contingencies so it is a a rapid market today just like the residential side probably with a little more complex but yes sure and in in the uh multi-family investment world and some of the other sectors we're even seeing hard earners money day one you see anything like that in a single tenant i have a deal that i'm getting uh the contract signed today where we had multiple offers and they kept raising their offers along the way and the seller our client said i'll tell them that we're going to have ten thousand dollars in non-refundable earnest money up front if he wants the deal he can have it they agreed so we we're today i expect the uh the purchase agreement to be executed it seems like the perfect sector if you're a buyer competing with other buyers it seems like the perfect sector to to be more comfortable uh with hard-earned money day one because there's there's less moving parts you probably know who the tenant is and uh there's one lease so it's a much cleaner investment anyway so that'd be interesting so how are buyers competing with cash buyers if they need to get a loan is it just really how fast can they close a new loan and how can they be competitive um we're seeing typically now a 30-day inspection a 30-day close if someone is doing financing what we've been doing is have a 30-day due diligence and have a 15-day longer 45-day loan contingency however what we put in the fine print is that at day one or within the first 10 days of the inspection period i will um apply for my loan and i'll show proof of ordering third-party reports so i've spent money and that seems to mitigate the concern about wasting time with someone who can't get financing okay so buyers are competing for properties you've got some great tips today one consider hard earners money day one if you have enough experience for that consider quick and clean time frames if you're going to get a loan have as much proof of ability to close as you can if you have cash you show that proof of ability uh and uh and and get you know your offer format right if you're starting to look at these things uh are you gonna write an loi are you gonna write a psa maybe you're going to do either depending on what the seller or listing agent wants right so be ready have those have those agreements ready to go right absolutely any final tips or or words of wisdom to in the net least world for the audience nancy before i let you go um i think we we hit on them i think we should uh let everyone know that it can be fun um you want to be proactive you want to [Music] work you know learn along the way as you're doing it and don't be afraid to put offers in um and let it be something that it's a diversification strategy that uh takes the heat off of you as you earlier mentioned it's a very passive way to have protected income for the long term so and i would i would say work with a broker who has experience in the sector because that broker is going to open the doors for you today that are locked to most people yeah all right a good point and i'd add that 2021 i think is a fantastic year to consider diversifying your your portfolio maybe consider taking some chips off the table while interest rates are low while we know we have the full 1031 that money is swirling in the market um and we know the capital gains are low most people think that capital gains will go up if there's a limitation on the 1031 it could be a very different market down the road so look at your portfolio today uh and and look at some options a broker like nancy or somebody in the specialty in your space i can share with you what it might bring today uh so you can make good decisions nancy great information thank you for joining us thanks for having me michael and thank you for joining us around the country we appreciate it and if you will hey share the show if you will subscribe to the show and connect with us on your favorite social media until next week be sure that you always lead learn and laugh and join us for america's commercial real estate show america's commercial real estate show is brought to you by buxton take leasing site selection and due diligence to the next level make the right decisions with on-demand mobile data visit buxtonco buxtonco.com by bull realty for proven commercial real estate asset and occupancy solutions contact me my email is michael realty dot com by commercial agent success expert level commercial real estate broker training cloud access won up to 21 one hour videos visit commercialagentsuccess.com thank you for reviewing subscribing and sharing america's commercial real estate

Channel: America's Commercial Real Estate Show

Views: 203

Rating: 5 out of 5

Keywords:

Id: 5pUmJDXjNjA

Length: 26min 44sec (1604 seconds)

Published: Wed Aug 18 2021