With stock market volatility, laughably low interest rates, and assets classes flunking (even within the commercial real estate world), triple net properties emerged as a legitimate asset class in summer 2020. COVID-19 has likely changed the retail industry permanently, and essential tenants in the triple net world will continue to be dependable investments. These investments offer a healthy return with relatively low risk in an uncertain economy, and in almost every product type cap rates have compressed.
Back in 2019 a new construction Dollar General was trading in the 7%+ Cap Rate range and investors expressed concerns about rural locations and too many stores being built. Now in June 2021 new construction Dollar Generals are dipping into the 5% Cap Rate range and developers are selling deals 6 months before rents even commence. That is just one example of how the supply and demand has shifted in the triple net world. These deals provide stable income and are well positioned to maintain or increase their values.
As we head into the later part of 2021 the same essential tenants that have been in favor for a year (Dollar General, Walgreens, CVS, 7-Eleven, O’Reilly Auto Parts, AutoZone, DaVita, etc.) continue growing and even the sectors that were hit hardest such as casual dining are slowly coming back. Additionally, QSR brands have implemented more efficient, contactless business models and are returning stronger than before. It will be interesting to see how long this ride of demand will continue. Now that the world is opening back up will deal flow start to slow down? Will talks of Biden getting rid of the 1031 start to affect the sector? Only time will tell, but one thing is for sure, 2020 was the year that triple net properties moved to the forefront in CRE and went from being an afterthought to a legitimate asset class.