Third Quarter STNL Report

In the days of coronavirus, it’s easy to become overwhelmed by all the bad news splashed across newspaper headlines, television chyrons and on social media. At Ground + Space, we strive to find the silver linings in even the most desperate of situations in order to provide our clients with a more comprehensive outlook on the economy as it relates to the commercial real estate sector. Let’s take a look at some of the major takeaways from the first few weeks of the third financial quarter of 2020:

STNL Properties are Poised for Success

Popular single-tenant net leased (STNL) properties include many essential retailers. Quick-service restaurants (QSR), auto parts stores like The Tire Choice, convenience stores, home improvement retailers and drugstore giants like CVS Pharmacy have all survived the COVID-19 pandemic relatively unscathed thus far. Not only are net-leased assets showing resilience in the face of a global pandemic, they are also properties that continue to attract capital in times of economic downturn.

What’s the secret to their success? Numerous national chains—like Wendy’s and McDonald’s—were aided by in-place drive-thru service, while more traditional restaurant chains and other brick-and-mortar essential retailers benefited from robust delivery, carryout and curbside pick-up platforms. Although many of these retailers reported a dramatic decline in foot traffic, those same retailers have seen profits soar as consumers increase the size of their receipts. Lowe’s and The Home Depot in particular set record highs for sales in the second financial quarter.

Power and Lifestyle Centers Outperform Expectations

Traditional enclosed shopping centers and malls have long been on the decline, but lifestyle and power centers have remained top of mind for both investors and consumers. The prevalence of essential retailers in these types of shopping centers—especially well-known grocery anchors like Whole Foods—has allowed operations to remain strong. In fact, only six percent of net absorption for the year thus far has occurred within this particular sector. A whopping 25 percent of newly vacant space has occurred at malls as retailers like GNC, Victoria’s Secret and Gap announced massive closures. As the market resizes, power and lifestyle centers will most likely attract both tenants and shoppers from malls as they begin to close for good.

Consumer Spending Begins to Recover

Although there has been little progress made regarding extending benefits from the original COVID-19 stimulus package, some segments of the country’s population have begun spending again. By June, many markets saw retail sales increases near pre-pandemic levels. However, only time will tell if this trend will continue into the third and fourth financial quarters. Several states have slowed or halted their reopening plans as new clusters of positive COVID-19 cases arise. If these trends continue, consumer confidence and, in turn, consumer spending, may decline yet again.

Ground + Space is Here to Help

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have several listings available featuring retailers that are in a prime position to succeed in a post-pandemic economy. We are committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond.

Stay Safe and Informed

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.


Commercial Real Estate Sales During COVID-19

Although commercial real estate sales have plummeted during the COVID-19 pandemic, some assets are still proving valuable to investors across the globe. Which retail assets are still selling during lockdown? Essential businesses.

What’s an “essential” business?

The exact definition of “essential” varies by location, but the Department of Homeland Security issued guidance on the subject in mid-March. Generally speaking, essential businesses include the following: supermarkets and grocery stores; big-box stores; pharmacies; convenience and discount stores; hardware stores; banks; gas stations and auto repair shops; and pet stores, among others.

Nonessential businesses, on the other hand, tend to be recreational in nature and do not provide needed services related to food, health or financial support. Restaurants fall into this category, but many state and local governments have allowed restaurants to remain open for curbside pick-up and delivery service.

What retail assets are selling right now?

The commercial real estate assets that have been most pursued by investors during the COVID-19 pandemic are single-tenant net lease (STNL) properties. Investors seeking a sense of safety in an uncertain economy are pursuing deals that feature a single-tenant property with a tenant that offers an essential service. These assets tend to boast net leases in which the tenant pays for most (if not all) of the property’s operating expenses.

According to data compiled by CoStar, investors have closed deals on more than 300 single-tenant properties since mid-March. These properties have been leased to tenants like CVS Pharmacy, McDonald’s, Burger King, Dollar General and Chick-fil-A.

Is there still a demand for STNL properties?

In short, yes. Net lease sales performed well in 2019, increasing by at least 11 percent to approximately $78 billion. The biggest driver in sales have been those investors engaged in a 1031 exchange. This particular type of transaction allows an investor to defer capital gains taxes by rolling profits from the sale of one property into a similar (or “like-kind”) property. Because of the COVID-19 pandemic, the Internal Revenue Service (IRS) extended the 1031 exchange deadline to July 15, 2020.

How can Ground + Space help?

Ground + Space is a leading commercial real estate firm that specializes in single-tenant and retail NNN investments. We have two outstanding “essential retail” assets on the market right now. Our CVS Pharmacy listing features a NN corporate-guaranteed lease that was recently extended by 20 years. The Tire Choice property that is currently available is situated within a dense retail corridor in The Villages, Florida and boasts a NNN lease. Our team is committed to providing up-to-date information and best-in-class services to clients during the COVID-19 pandemic and beyond. The market changes daily, so please contact one of our brokers for specialized guidance during this time.

How can I stay informed?

The Centers for Disease Control and Prevention (CDC) offers daily updates and other information about COVID-19 symptoms and testing in the United States. Johns Hopkins University (JHU) has created a resource to help inform the public and advance comprehensive understanding of the novel coronavirus and its effects backed by experts in global public health, infectious disease and emergency preparedness. Additionally, the World Health Organization (WHO) continues to track the number and location of confirmed cases of the virus across the globe.


Net Lease Market Outlook

After a solid 2019 performance, the net lease industry appears to be headed for continued success in 2020. A combination of low interest rates, changes in the United States tax code and the desire for greater return on investments have caused high demand within the net lease market segment.

Lower Interest Rates, Greater Yields

At the start of 2020, many investors feared interest rates might increase, which would lead to a correction. Instead, interest rates have remained fairly low. Since the cost of capital is lower, buyers are free to invest money into larger deals. With this in mind, many commercial real estate owners are taking this opportunity to sell their smaller assets at superior price points. This, in turn, has created a steady supply of properties for potential buyers.

Slight Slowdown in Retail Development

A decrease in retailer development in certain markets has led to an inevitable slowdown in new retail development since 2016. However, the properties that are being built are extremely desirable for buyers. As always, newly built assets are sold at a premium due in part to their long lease terms and low maintenance costs. In addition to these new construction projects, resale properties have become popular in many markets.

Types of Properties in High Demand

The single tenant net lease (STNL) market has long been viewed as a stable investment vehicle. Guaranteed rents and known financials are just two of the many factors that make net lease assets ideal investments. The most in-demand properties in the STNL sector have a few things in common: these assets are brand-new construction in enviable locales with credit-backed tenants. Additionally, potential buyers prefer properties with Internet-proof tenants.

These preferences have led to the rise in popularity of quick-service restaurants (QSRs) among investors. Most trophy assets in the QSR market feature strong credit tenants whose profits are not hampered by Amazon and other Internet retailers. These lower-priced properties tend to have scheduled rental increases every five years and longer lease terms. Ground + Space currently has a McDonald’s for sale in California, Maryland that is a prime example of an enviable QSR asset. Other popular tenants in the QSR space include Starbucks and Dunkin’ Donuts.

Multi-tenant properties are also in high demand, especially those created via break-up strategies. To put it simply, a break-up strategy involves dividing a property into multiple parcels which can then be independently sold to different investors. This strategy is successful in part because it caters to the needs of a larger field of buyers. More buyers are in need of properties within the $2 million to $5 million range than larger properties with price tags of more than $30 million. The team at Ground + Space have worked with several property owners to facilitate break-up strategy sales of trophy assets in major markets.

About Ground + Space

Interested in maximizing your investment opportunities? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to receive a full evaluation of your commercial real estate assets. We can help you determine whether now is a good time for you to sell your property.


Why Drugstore Chains are Still a Good Investment

Drugstore industry giants like CVS and Walgreens are rethinking their expansion plans. Changing consumer shopping habits, tightened pharmacy reimbursement rates and increased tariffs on Chinese products are just a few of the factors drugstore retailers cite for the slowdown in new store development.

Changing Retailer Strategies

CVS Health announced in early August its plans to slow annual store expansion for the next two years as it makes changes to its business model and focuses on delivering high financial returns for investors. The company is set to open only about 100 stores in 2019—just one-third of its typical volume—and only 50 new stores in 2020. The company also plans to shutter 46 underperforming stores and reevaluate nearly 500 annual lease renewals.

Walgreens Boots Alliance is scheduled to close at least 200 stores across the United States as it begins to implement a new cost-management program aimed at cutting operating costs by $1.5 billion by 2022. In 2018, Walgreens added 1,932 Rite Aid stores and distribution centers to its portfolio for $4.4 billion. As of August 2019, the company has more than 500 surplus properties for sale.

The Future of Drugstore Retailers

Like most retailers, CVS and Walgreens are reacting to a change in consumer spending and shopping habits. As the e-commerce industry continues to boom, both CVS and Walgreens plan to invest in experiential retail solutions to attract and retain customers. CVS plans to roll out 1,500 HealthHUB store formats by the end of 2021. The additional 20 percent of floor space dedicated to health services will include everything from on-demand health kiosks to space for yoga classes. Walgreens is doing much the same as it adjusts its business model to place more emphasis on merchandise like beauty products and health equipment. The company also plans to expand its Partners in Primary Care centers within retail stores which offer specialized services for seniors with Medicare Advantage health care plans.

What Does This Mean for Investors?

In the grand scheme of things, these store closings and the scaling back of future development is insignificant. Those impacted most will be current owners of drugstore properties. In the wake of these announcements by CVS and Walgreens, some owners will need to find new tenants and face the possibility of having to accept less rent. (After all, banks and drugstores tend to pay higher-than-average market rental prices.)

With a dwindling stock of new properties on the market, the biggest challenge for brokers going forward will be selling properties with shorter lease terms. However, drugstore properties are still in high demand. Steady cap rate trends, strong corporate guarantees and minimal landlord responsibilities all factor into the success of drugstore transactions.

Interested in investing in a drugstore property? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


4 Ways to Determine the Value of an Investment Property

The value of a commercial or retail property heavily influences its operational performance, the tenants’ leasing options and the investment yield. Investors and appraisers utilize several different methods to determine the value of a property, often depending on the type of real estate, the availability of information or the goal of the investment. Gain insight into four of the most common methods below to accurately assess the value of single and multi-tenant commercial properties and maximize your profits from retail real estate leasing.

The Income Approach

The income approach is a frequently used method for evaluating a commercial property. In this situation, the value of a retail investment property relies on the interpretation of the net operating income (NOI) and the capitalization rate (cap rate). The NOI of a retail property is determined by subtracting operating expenses and vacancies from the overall potential rental income. The cap rate predicts the annual rate of return by dividing the NOI by the most recent value of the property.

By evaluating these factors, the investor focuses on recent sales and operational figures. The income approach also allows for simple adjustments to account for unique scenarios, such as likely tenant additions or scheduled maintenance.

The Cost Approach

The cost approach method considers the cost of the land plus the cost of constructing the “highest and best use” building from scratch. For example, if the piece of land is worth $100,000, and constructing a multi-tenant retail property would cost $1.2 million, the cost approach would value this commercial real estate at $1.3 million.

This approach is commonly used for new construction and vacant lots. The simplicity of the cost approach is appealing to investors and appraisers. Additionally, the cost approach accommodates for unique factors such as zoning laws to yield an accurate and current valuation.

The Capital Asset Pricing Model

The capital asset pricing model (CAPM) is a comprehensive approach to assess a commercial or retail investment property that includes risk and opportunity cost. The CAPM considers the return on investment (ROI) on a risk-free investment, and labels it as a control, which is referred to as “beta.” Frequently-used betas include US Treasury bonds or real estate investment trusts (REITs). This valuation method is based on the comparison of expected returns between a guaranteed investment and the property in question. If the potential returns on a bond exceed those of a retail investment property, the investment isn’t financially advisable.

The CAPM assumes inherent risk and natural economic behavior that doesn’t always meet expectations. Accordingly, net lease investors find the CAPM useful for estimating the value of a property investment, understanding the approximate risks and establishing optimal tenant leasing structures.

The Sales Comparison Approach

The sales comparison approach (SCA), sometimes referred to as the market approach, utilizes prices from similar and nearby commercial or retail investment properties. This method takes the property’s general attributes into consideration and is best applied over a significant period of time. Investors and appraisers rely on the uniform metrics in this approach, such as price per square foot and recent sale price, to determine the value of the commercial real estate in question.

The SCA has the advantage of simplicity and accessibility, but often neglects the uniqueness and distinctive characteristics of a commercial property. Investors and appraisers find the SCA useful to gain insight on neighborhood pricing trends or for quick property valuations.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


How to Calculate a Net Lease

Triple net leases, or NNN leases, are common commercial real estate contracts for those organizations and companies seeking rental spaces to grow their business and provide steady financial growth with low-risk factors. A triple net lease transfers all of the additional expenses associated with owning and operating the property from the landlord to the tenant. These expenses include the net real estate property taxes, net building insurance and net property maintenance. Because the tenant assumes these additional financial responsibilities, triple net leases generally have the lowest rental rates. How does the landlord determine these rates and expenses? Here is how to calculate a net lease.

Expenses and Payments Associated with Triple Net Leases

Triple net leases require the tenant to pay all three of the additional expenses associated with the property, while single and double net leases only require the tenant to pay a portion of these fees. The landlord may prefer the tenant to make these payments directly each month or to cover the costs of these expenses through adjustments made at the anniversary of the leasing term–whether the lease is terminated or renewed. As property taxes fluctuate annually, the landlord should provide the tenant with a property tax statement and the portion of taxes the tenant is responsible for when renting in a multi-tenant building.

Calculating a Triple Net Lease

Triple net leases are calculated by adding the yearly taxes on the property and the insurance for the space together and dividing that amount by the building total rental square footage. The process of calculating a triple net lease is simplified when an entire building is leased to one tenant.

However, in multi-tenant buildings, it’s important to take account of the maintenance and upkeep of common areas within the space. These common areas include spaces such as lobbies, courtyards, communal bathrooms and hallways. Determine the yearly cost of maintaining and operating these common areas and divide that total by the amount of rental square footage within the building. Then, take this number and add the total amount for property taxes, insurance, maintenance expenses and common area expenses and divide the total by 12. This number is the monthly cost. Add this monthly cost total to the monthly rental rate per square footage and multiply this number by the number of square feet each tenant leases to determine the triple net lease amount for each tenant in your building.

Understanding how rental expenses are charged within different leases is a crucial component of responsibly renting commercial real estate spaces. Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


What is a Percentage Lease?

When renting commercial real estate spaces, it’s important to understand the different types of leases to ensure the most practical and beneficial contract between the landlord and the tenant. Of these different lease types, net leases and gross leases are the most commonly known. However, percentage leases are also widely used in commercial real estate because of the beneficial properties they offer both the tenant and the landlord. Find out what you need to know about percentage leases.

What are the features of a percentage lease?

A percentage lease is a contract between a landlord and tenant where the tenant agrees to pay a predetermined rental rate in addition to a percentage of the sales earned while conducting business on the rental property. Because of these provisions, this type of lease is used exclusively in commercial real estate–particularly in retail mall outlets and companies with high sale volumes.

How is a percentage lease calculated?

Percentage leases have a predetermined base rental rate. The percentage of sales the landlord receives is determined once a base amount of gross sales is met. This base amount is called the breakpoint. Two different types of breakpoints exist to accommodate different calculations of a percentage lease.

An artificial breakpoint is a set dollar amount of sales both the landlord and the tenant agree on. This means a percentage of sales that exceed the set dollar breakpoint amount is paid to the landlord in percentage rent. In contrast, a natural breakpoint is when the base rent is divided by the established percentage to determine the breakpoint amount. This calculation ensures that a tenant only pays a percentage expense on the sales that exceed the amount required to pay the predetermined rental rate.

What are the benefits of a percentage lease?

Some tenants may be attracted to the terms of a percentage lease because these contracts typically have a lower fixed rental cost each month. In addition, the percentage lease is commonly used in multi-tenant buildings, which means these shopping centers or retail malls are a natural draw to other businesses in the building and can benefit tenants with both large and smaller sales.  

Percentage leases can also benefit the property owner because they have the ability to choose the type of businesses and companies that are placed within the retail space. Accordingly, strategic leasing can attract more customers to the space, which gives the landlord the opportunity to negotiate a percentage of sales.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


What is a Double Net Lease?

A net lease is a popular form of a commercial real estate lease where the tenant assumes certain financial responsibilities in addition to the pre-determined rental rate. Different variations of net leases exist to accommodate specific building expenses–single, double and triple net leases. The biggest difference between these net lease variations is how the additional expenses are divided between the landlord and the tenant. Here is everything you should know about double net leases.

What are the features of a double net lease?

In a double net lease, the tenant agrees to pay the property taxes and insurance fees in addition to the pre-determined rental rate. A double net lease gives the tenant more financial responsibility than a single net lease, but also requires the landlord to handle repairs and pay any necessary maintenance fees. In a multi-tenant building, the property taxes and premiums for property insurance can be split on a pro rata basis between the other tenants renting within the building.

What are the advantages of a double net lease?

Landlords may use a double net lease because it shifts most of the financial responsibility, and thus much of the organizational pressure and stress that comes with managing and paying multiple property expenses. However, as landlords remain responsible for the upkeep and maintenance of the property, they still assume a certain level of control over how the space is used and maintained. Additionally, tenants may opt for a double net lease because these contracts typically have a lower rental rate than a single net lease and less financial management than a triple net lease.

What are the considerations of a double net lease?

While a double net lease limits the financial risk for landlords, property taxes and insurance fees typically still pass through them to ensure these important expenses are paid correctly and in a timely manner. Accordingly, this can complicate this process instead of simplifying it. Additionally, tenants need to consider the property taxes and insurance fees and understand that the responsibility of these additional expenses may outweigh the lower rates in rent in some cases.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!

 


What is a Pass Through Lease?

In the world of commercial real estate, leases primarily fall into one of two groups–a net lease or a gross lease. A gross lease is a contract that includes a predetermined rental rate regardless of the cost of additional property expenses. In contrast, a net lease, a popular form of commercial leases, requires the tenant to pay the rental rate in addition to a portion or all of the expenses associated with operating the property. Specific pass-through provisions can exist in commercial net leases to streamline this process. Here is everything you should know about leases containing pass-through components.

What is a pass-through lease?

A pass-through lease is a contract where specified operating expenses “pass through” from the landlord to the tenant. These additional expenses can include any combination of property taxes, insurance, maintenance, repairs and utilities. Pass-through leases can be found in both single-tenant and multi-tenant buildings. If one tenant is leasing the entire building, the additional financial responsibilities typically include the maintenance and care of the landscaping and exterior upkeep. In multi-tenant buildings, tenants only pay these additional expenses in proportion to their usage of them.

What does a pass-through lease mean for the tenant?

While a pass-through lease requires the tenant to assume more financial responsibility, it also allows the tenant to gain more freedom and control over operational costs that affect their business directly. Smart tenants know that the more financial control they have over the space their company operates in, the easier and more beneficial these expenses can be for their business. Accordingly, tenants can use the advantages of these pass-through provisions to leverage their business’s environment and rental space.

What does a pass-through lease mean for the landlord?

Pass-through leases relieve the landlord of a significant amount of financial and organizational responsibility when it comes to handling additional expenses and coordinating maintenance and repair services. Landlords generally prefer the pass-through leasing components to be as inclusive as possible because this allows the landlord to pass off almost every operating expense to the tenant.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


Why are Triple Net (NNN) Leases So Popular?

Triple net leases, or NNN leases, have become increasingly popular in recent years, and it is important to know what sets them aside from the single net lease and double net lease. A triple net lease is a more simplistic lease in which the landlord holds little to no responsibility for the NNN lease property. In a triple net lease, the tenant is liable for property taxes, insurance and maintenance, relieving the burden and unpredictability of those costs from the landlord. Maintenance and repairs are additionally at the discretion of the tenant, leaving the landlord with minimal upkeep and few if any fees. The greatest difference between a triple net lease and a single or double net lease is the long-term nature of the contract. Most often, a triple net lease involves a 10-plus year term with a singular tenant.

Who Should Invest in a Triple Net Lease?

Ideal candidates for triple net leases are those seeking real estate investments that provide steady financial growth with relatively low risk and the potential for possible capital appreciation of the property. Investors should be prepared for a 10- to 15-year lease term in which a built-in rent escalation contract is instilled. A triple net lease is especially beneficial for an investor desiring a hands-off approach to managing the net lease property. Instead of micromanaging the operation’s taxes, maintenance and insurance, a triple net lease investor is willing to set aside all of these details to the tenant. While those investing in an NNN lease property accrue a steady profit over the length of the triple net lease, an investor must already hold a net worth of a minimum of $1 million to be qualified.

What are the Primary Benefits?

Simple

Triple net leases offer a low-maintenance upkeep that cannot be found in single and double net leases. With the main responsibilities of taxes, maintenance and insurance being shifted to the tenant for a locked-in term of 10 to 15 years, the investor has little to no responsibilities to manage on a regular basis.

Consistent

The nature of a triple net lease is to have agreed upon terms for the duration of the lease with any set rent increases drafted in the contract. The purpose of this type of an agreement is to ensure that both parties have an awareness of the fiscal elements of the term with no unexpected alterations. The investor then benefits from a consistent and reliable stream of income while the tenant is guaranteed a known price for the duration of the term.

Low Risk

Investing in triple net lease properties has little room for problematic risks thanks to the agreed upon terms of the contract. A triple net lease releases all of the maintenance, repair, taxation and insurance concerns to the tenant, leaving the investor free of any unforeseen costs. Additionally, if the NNN lease property is sold, the investor has the ability to transfer his or her capital into a different triple net lease investment with no taxation thanks to a 1031 tax-deferred exchange.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!