Retail Closures and Other STNL News

Many retailers that found themselves struggling in a pre-coronavirus world dominated by increased e-commerce adoption rates have begun to restructure their business models or close their doors for good. Current research shows that between 20,000 and 25,000 storefronts are expected to shutter forever by the end of 2020. This is a dramatic increase compared to the 9,300 store closures reported in 2019. At least 15 major retailers have filed for some form of bankruptcy protection.

What retailers are closing their doors and filing for bankruptcy? Are any retailers expanding their footprints amidst the nationwide pandemic? Let’s take a look.

Store Closures and Bankruptcies

As of early June, at least 4,000 storefronts are in the processing of closing. More than half of those can be accounted for by six major retailers, including: Pier 1, Tuesday Morning, GNC and JCPenney. Other retailers that have either filed for bankruptcy or announced store closures include: Papyrus, CMX Cinemas, Starbucks, Victoria’s Secret, J.Crew, Neiman Marcus, Macy’s, Payless, Dress Barn and Gymboree.

Pier 1 filed for bankruptcy in early February. Three months later, the company is ceasing all its retail operations and expects to close all of its remaining stores by October 2020. The company is currently working to liquidate the remainder of its assets. Discount home goods retailer Tuesday Morning joined Pier 1 in filing for bankruptcy in late May. The Dallas-based chain will permanently close at least 230 of its nearly 700 stores in the United States this summer. During the Chapter 11 bankruptcy process, the retailer hopes to renegotiate many of its leases so it can focus on improving product offerings in its remaining high-performing stores.

The health and nutrition chain GNC will close at least 900 of its retail locations by the end of 2020. CEO Ken Martindale pointed to decreasing mall traffic as one of the many reasons the company has decided to significantly reduce its footprint. GNC plans to reduce its mall count by nearly half. (Currently, mall locations make up about 23 percent of GNC’s retail footprint.) Another former mall staple—the 118-year-old company JCPenney—filed for bankruptcy in early May. The coronavirus pandemic had a dramatic effect on the department store chain, resulting in major decreases in store sales. The company hopes to continue doing business even while closing a at least 154 of its remaining 846 stores.

Some Good News

Although few retailers are focusing on expansion plans during the midst of this nationwide pandemic, some notable brands—most in the quick-service restaurant (QSR) sector—are hiring more workers. Fast-food chain Dunkin’ announced its plan to hire at least 25,000 new employees nationwide. Taco Bell made a similar announcement in late May as it unveiled its plan to hire 30,000 workers this summer.

Because of the relative strength of QSR assets, they are at the top of investors’ lists as many in 1031 exchanges prepare for the July 15 IRS tax deadline. Single-tenant, net leased assets are still trading even as investments in department stores, strip centers and other non-essential retailers have been put on hold. Retail assets valued between $1 million and $5 million that feature essential tenants like Dollar General, McDonald’s, 7-Eleven and Wawa are doing well, although they are being sold at higher cap rates.

Navigating These Uncertain Times

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. The market changes daily, so please contact one of our brokers for specialized guidance during this time.

Stay Healthy and Safe

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.


Pandemic Reshapes Commercial Real Estate Market

Since March, the COVID-19 pandemic has caused dramatic changes in the way individuals do business and buy goods. These changes have not only affected the retail sector—every aspect of the United States economy has been impacted in some way. Here we take a look at some of these changes and how they will influence the future of the commercial real estate market.

Physical Versus Economic Vacancies

Retailers deemed nonessential during the COVID-19 pandemic are facing a dramatically different economic outlook than their essential retail counterparts. Experiential businesses, buffet-style restaurants and retailers facing financial hardships before the pandemic began currently face an uncertain future. Although many businesses have begun opening their doors as nationwide restrictions have been partially lifted, some retailers might be forced to close their doors for good.

Higher vacancy rates are expected as a number of retailers reassess their position in the marketplace. Although more and more storefronts have shuttered, a number of leases still remain in effect. This, in turn, has expanded the gap between physical and economic vacancy. According to some reports, the average physical vacancy rate will jump to between 5.6 and 6.8 percent by the final quarter of 2020. The economic vacancy rates are expected to be even higher as retailers grapple with new regulations, depleting cash reserves and lack of financial assistance.

Construction Projects Slow and Rent Prices Fall

As a result of the pandemic, developers and retailers are slowing down the rate of construction and expansion projects. Completed projects during the first three months of 2020 dropped to just 8.3 million square feet. Inventory additions are expected to decrease to levels not seen since 2000 by the end of the year. Although some projects have been cancelled altogether, many others have simply been put on hold and are expected to resume in 2021. There is a silver lining, however: Single-tenant net lease (STNL) properties will account for the largest portion of this year’s construction projects at nearly 17 million square feet.

Less new available space and rising vacancy rates will have a negative effect on asking rent prices for commercial real estate assets. During the first quarter of 2020, asking rent climbed to an average of $20.50 per square foot. Some experts believe asking rent prices will fall as much as 9.4 percent by December 2020.

STNL Assets Are Still Going Strong

Long-term security is just one of the reasons investors are targeting STNL assets now more than ever. Discount retailers like Dollar General and Dollar Tree have attracted a wide range of investment offers, along with other essential retailers like CVS Pharmacy. Quick-service restaurants (QSR) with drive-thru service windows are also being targeted as these retailers have generated near pre-pandemic sales. For now, buyers are less interested in fitness centers, department stores, sit-down restaurants and strip centers with a number of nonessential tenants.

Navigating These Uncertain Times

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. The market changes daily, so please contact one of our brokers for specialized guidance during this time.

Stay Healthy and Safe

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.