While some types of retail property have done better than others during the pandemic era, there is one retail type that has proven to be a clear winner.
Stand-alone retail properties, also known as Triple Net Lease (NNN) properties are usually occupied by a corporate client such as a major bank, grocery store or big pharmacy. They have long been a preferred asset for investors, but now we’re seeing a significant increase in buyers searching for this type of commercial property.
The appeal for many savvy investors is the security and stability offered by the strong covenants and long, triple-net terms that usually govern the leases of these types of properties.
What are Single-Tenant Retail Properties?
Triple-net leases usually cover 10 to 20 years, with annual rent increases, or escalators, built in. The tenant is provided near-total autonomy of the property and pays not just rent and utilities, but three additional categories of property expenses: property tax, insurance and most maintenance costs, such as landscaping and snow removal.
Demand for quality single-tenant retail properties continues to outpace supply according to some industry experts. With investors keen to capitalize on low interest rates in anticipation of higher borrowing costs in the latter half of 2022, “bidding wars” are not uncommon. In addition, with lower listing prices than multitenant buildings, single-tenant retail properties are a strong draw for private investors.
Challenged by the acute supply shortage of industrial property and intensive management required for residential investment, “a lot of investors are chasing these single-tenant retail buildings,” Mr. Grewal says.
A crucial score point is capitalization rate, “the basis for valuing these properties,” he says. “The cap rates are no different for single-tenant properties than they are for multitenant properties. And you don’t have the management headaches. If [tenants] run their business to be successful, they make sure their building is well maintained.”
Benefits of Single-Tenant Investments
Single-tenant properties can be beneficial for both landlords and their tenants. For property owners looking to expand their investments, a NNN property would pivot the burden of potential small financial responsibilities onto the tenant. These types of properties also tend to be relatively stable — which is important in a real estate market that is constantly evolving. Some additional benefits include:
- Hassle-free ownership with decades of reliable monthly income.
- A long-term, guaranteed lease means no or low vacancy.
- Periodic rent increases built into the lease account for inflation.
- Prime location that’s easily re-tenantable at end of the lease term and valuable.
- Opportunity to build equity over the lease term.
- High-credit corporate lease guarantee appeals to lenders.
Most often, single-tenant properties are tenanted by investment-grade corporations that operate with absolute triple-net (NNN) leases. These tenants are usually consumer staples in prime, high-traffic locations that tend to do well in any types of economy without large shifts in value, so they tend to be low-risk, recession-proof, and pandemic-proof of the most part. Some examples:
- Dollar Stores
- Pharmacies & Drug Stores
- Health Care Centers
- Gas Stations
- Convenience Stores
- Child Care & Early Learning Centers
- Car Washes
- Fast-food Restaurants & Drive-thrus
- Quick-service Restaurants
- Auto-parts Stores
- E-commerce Fulfillment Facilities
- Warehouse & Distribution Centers
- Industrial/Manufacturing
Summary
Thanks largely to the significant increase in sales of industrial and multifamily properties, commercial real estate investment in Canada has reached historic highs. It is interesting to note that retail property investment across the country has also increased compared to pre-COVID-19 levels, according to the following CBRE statistics from January-September, 2021:
30 per cent: increase of retail property investment in Canada since pandemic
70 per cent: increase in industrial real estate
90 per cent: increase in multifamily real estate