Net Lease Investors Seek Essential Real Estate During Pandemic

Single-Tenant Properties Are Among the Few Selling While Rest of Market Stalls

By Richard Lawson CoStar News

May 15, 2020 | 04:23 P.M.


Just over a week ago, a private investor bought an Albertson’s grocery store in downtown San Diego that remained open while most businesses in the city had closed along with the rest of California to curb the spread of the coronavirus.


Property records show the investor paid $22.1 million for the grocery store just as commercial real estate sales across property types started grinding to a halt in the health crisis.


Though large parts of the country were closed, grocery stores were deemed essential along with such businesses as pharmacies, auto parts stores, convenience stores and collision centers. With the pandemic spreading, investors seeking safety in a sinking economy have increasingly pursued these types of essential properties, according to real estate brokers.


The properties tend to be single tenant and have net leases in which the tenant pays for most of the property’s operating expenses instead of the landlord. The landlord earns a return on investment for taking the risk with the tenant.


At this point, a single-tenant property with an essential service can be a better investment than strip centers with several tenants considered non-essential, said Randy Blankstein, president of Wilmette, Illinois-based real estate firm The Boulder Group.

“On a macro level, everybody wants to be in a sector that is 100% leased,” Blankstein said. “People want the essentials and open tenants.”


Demand Remains


Net lease sales are coming off a strong year. Net lease investments "increased by 11% in 2019 for a record $78 billion, outpacing the growth of all other commercial real estate sectors,” Camille Renshaw, CEO and co-founder of net lease brokerage B+E, wrote in a March letter to clients. “Demand is consistent, but supply is tight.”


Sales volumes rolled into this year and continued at a slower pace in the health crisis, brokers said.


They said investors shielding themselves from capital gains taxes through so-called 1031 exchanges have been the biggest drivers in sales. It’s a part of the Internal Revenue Service code that allows investors to roll the profits from the sale of one property into a “like-kind” property to defer capital gains taxes.


The Alberton’s deal was such an exchange. Kevin Mansour, one of the brokers on the Albertson’s deal with Marcus & Millichap’s San Diego-based The Mansour Group, said the buyer, who operated through a limited liability corporation, rolled proceeds from the sale of an apartment building into that purchase.


With these exchanges, the seller has 45 days to choose the next property and close within 180 days of the first sale. Because of the coronavirus pandemic, the IRS extended the deadline to give investors more time on deals.


Investors now have until July 15 to close on a deal if either the 45-day sale agreement or 180-day closing deadline was scheduled to expire between April 1 and July 15 this year.

“That’s helped people look at more options,” Mansour said.


Investors across the country snapped up more than 300 single-tenant properties leased to such tenants as McDonald’s, Burger King, Walgreens, Dollar General, Chick-fil-A, Raising Cane’s and CVS since mid-March when the first cities and states started shutting down, according to CoStar data.


Prices ranged for the other deals from $625,000 for a Dollar General in Hephzibah, Georgia, to $11.6 million for a Walgreens in Orlando, Florida, that had been on the market for nearly eight months.


“Dollar General has been one of the hottest things out there,” Mansour said.

Dollar stores sell grocery items, giving them essential status during the pandemic. CoStar data shows more than 80 Dollar General stores have sold since mid-March.


Walgreens, CVS and Rite Aid, the three largest drugstore chains, have emerged from a lull. Prior to the pandemic, investors grew wary of the drugstores because of corporate decisions to close stores.


Mansour said an oversupply of these properties had developed but “now we’re seeing those snatched up.”

While drugstores are now back in focus, “not many new ones have been built for several years,” said Barry Wolfe, a net-lease broker with Marcus & Millichap in Fort Lauderdale, Florida.


Brokers said medical properties in general such as urgent care and dialysis centers will see gains going forward given the health crisis.


And as the sales over the past two months show, real estate leased to fast food and fast-casual chains haven’t lost favor with investors. Unlike casual dining chains that were closed and had to pivot to delivery and takeout during the pandemic, most fast food and fast-casual restaurants already had a drive-thru and takeout business.

If restaurants didn’t adapt, “you’re in trouble in reality,” Wolfe said.


Little Taste for Casual Dining


Only a handful of casual dining properties have sold across the country in the past two months.


Casual dining had been feeling the competitive heat before the pandemic from chains offering quicker service without table service. The real estate had its buyers depending on location and brand. But prices were dropping and yields, known as the capitalization, or cap, rate, were rising because of the higher risk.


The pandemic delivered a heavy blow to them when cities closed dining rooms. Olive Garden, IHOP, Applebee’s Bar & Grill, Chili’s Grill & Bar, Outback Steakhouse and others sought to adapt with takeout and delivery. But those sales didn’t reverse the negative sales slide.


To help with lower expenses, Dallas-based Brinker International, which owns the Chili’s brand along with Maggiano’s Little Italy, said in its latest earnings report that landlords had given rent concessions on many properties. And where they hadn’t gotten them, the company was reducing rent payments.


Orlando, Florida-based Darden Restaurants, owner of Olive Garden and LongHorn Steakhouse, didn’t mention rent concessions in its most recent earnings report, nor did Glendale, California-based Dine Brands Global, owner of Applebee’s and IHOP, and Tampa-based Bloomin’ Brands, owner of Outback Steakhouse.


Even with cities allowing dine-in restaurants to reopen, local rules are preventing them from packing in the crowds. So, they won’t be operating at full capacity for a while.

Golden Corral simply decided to close some locations permanently rather than reopen them. Two of them are in North Carolina, one in Raleigh and the other in Henderson and another is in Enid, Oklahoma, 85 miles north of Oklahoma City.


Until the coronavirus pandemic passes and the economy is fully on the mend, investors will shy away from casual dining real estate for the most part, brokers said.

Broadly, Blankstein said, the flight to quality and safety in major metropolitan areas may mean second-tier brands in second-tier markets take a back seat for a while.

“People don’t know how long this will last,” he said.


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