Big Box NNN – what’s the big deal?

With vaccine progress and the economy gradually reopening, triple net lease investors have steadily returned to the market, albeit with a focus on a smaller, not larger asset pool.  NNN Investors are paying attention to what essential, which implies big box, grocery, drug stores and home improvement.  Cap rates for this type of property hit a low in the final quarter of last year cap rates for single-tenant, big-box space fell to 6.8%, a 20-plus-bp drop, YOY.  Analysts say anecdotally that only the best is trading right now, and investors are shunning gyms, fitness and restaurants.  This market thins out, lacking owners who don’t want to sell them together with buyers who are being skittish of such NNN deals.

Essential-business models, in the NNN space have maintained strong financial positions, and as a result, there is a clear bifurcation in rent collection between non-essential and essential tenants.  Some report that rent collections among multitenant retail and mall properties ranged between 29% – 55%; compare this to 70-85% of essential-business tenants continued rent payments!

From Lowe’s and Kroger to Whole Foods or Sprouts, “essential” big box national retailers attracted most of the investment over the past 18 months. After an aberrant 6 months, transaction volume surged to over $17 billion by Dec 2020. This increase reflects more than 60% of the average $ transactions for 2018, 2019 and 2020.  Even as multitenant properties with strong grocery anchors, became a headache for lenders, sales for essential big box tenants have soared: witness: Target., an essential big-box retailer, reports revenue growth of more than 19% year over year, 2020.

Sales among single-tenant, essential NNN investments properties anchored by big box retailers and pharmacies have highlighted the change in the types of NNN deals that have begun trading since late 2020. Analysts report the preponderance of single-tenant, net-lease NNN sales because of net lease buyers’ growing appetite for quality assets.  As a result, these types of NNN big box essential investments, have demanded significant price premiums.

The grocery sector has been the winner during this pandemic, including Costco, Target, Kroger, Walmart, etc., and a close second, home improvement, Home Depot and Lowes etc.   In 2020, NNN properties with grocery tenants accounted for more than 32% of the market, up 19% from 2019. Tenant quality and financial resiliency will continue to be uppermost with NNN lease investors. In 2020, big box NNN net lease properties were priced 1% lower than their non-investment grade counterparts. However, opportunistic net lease investors should monitor the sector for non-credit big box NNN surprises! Cap rates have ranged from 5%-7.0% across the nation, with the West leading the way and the Mid-west at weakest.

Call the NNN big box experts at the Triple Net Investment Group for the best advice on the deal on your table. With decades of experience and hundreds of millions of dollars of properties successfully transacted for a repeat clientele, you will succeed fast and best for your NNN investment goals this year.