Single-tenant triple-net (NNN) leased properties remain a solid investment choice for both passive and active real estate investors in 2019. Relatively low cap rates make it a good time to sell and long-term leases with periodic rent increases enhance future value for buyers.
Single-tenant NNN leases offer landlords and investors a number of advantages and can be a gateway to bringing retail into your portfolio. Here’s everything you need to consider and what to look for in single-tenant NNN lease investments.
Advantages of a single-tenant NNN lease
Single-tenant NNN leases are for a single, free-standing building occupied by a long-term national or credit tenant, and they typically last 10-15 years. Under this type of lease, if structured properly, the tenant is responsible for operating and maintaining the entire property, from the building and parking lot to the surrounding grounds, along with paying insurance and property taxes.
These leases act like a bond where landlords collect monthly rent in the mail for the entirety of the tenancy. Since tenants handle all the property maintenance and expenses, you can own a property on the other side of the country with almost no management responsibility. Much of the value lies in the credit-worthiness of the tenant and the long-term nature of the cash flow.
Perfect for landlords and investors who are hands-off, single-tenant NNN leases are designed to scale multi-asset classes. You have the ability to buy a bundle of them from all over the country, and manage them from the comfort of your office because the lease is already in place. A big fund company will raise capital and purchase a group of these properties at once. A great example of this is Sherwin-Williams. The company recently sold over 100 freestanding buildings from Pennsylvania to California to one company as part of a sale-leaseback.
Of course, there is a downside to these leases: Since the lease has been cast and won’t change for potentially 15 years (or longer with renewal options), there’s no major value creation for the landlord, except for periodic rent increases or cap rate compression. Unlike a multi-tenant shopping center, where you can move or replace tenants or downsize, you can’t do anything to a single-tenant building until the tenant leaves. A single-tenant NNN lease might sell five times, and every new owner that comes to an encumbered lease that might have been signed a decade ago.
Why now is a great time to add single-tenant NNN leases to your portfolio
Many retailers and particular use groups including restaurants, automotive stores, convenience stores, drug stores, mattress stores, and banks prefer stand-alone buildings to provide enhanced accessibility, visibility, brand identity, and control. Some retailers including Aldi are looking to relocate from shopping centers and inline spaces to single-tenant freestanding buildings. These retailers need to revamp their stores, and stand-alone buildings provide them with more desirable physical attributes.
Under a single-tenant NNN lease, landlords can keep valuable, high-credit, low-risk tenants there long term, or once the lease is complete and the tenant is open for business, they can sell it on the open market.
Landlords who want to diversify from other uses such as apartments, office buildings, or self-storage can buy a single-tenant NNN leased property to test out retail without having to own a 100,000-square-foot shopping center right off the bat. They can dip a toe in the water to see how the tenant operates and how the market reacts, and if they like the results, they can acquire additional properties and build their retail presence.
Not to mention that certain retailers will likely prefer to lease in stand-alone buildings. Today, shopping center owners are looking for more opportunities to monetize their investments and in particular, exploring whether they can add a retail pad in the parking lot. A pad site leaves a great opportunity for a restaurant, drug store, bank, or fast-food concept to come in and set up shop.
Retailers are measuring themselves against the internet. They want to be front and center on corner lots with their own parking instead of buried in the back, where even though they might be paying cheaper rent, they’re not competing as well.
What to look for in a single-tenant NNN lease
For those interested in purchasing a single-tenant NNN leased property, look for long lease terms, periodic rent increases, credit tenant entities, and a lease structure that minimizes the management responsibility of the property owner. In addition, location and real estate is cliché but true for this type of investment. Look for properties on good corners with great morning and afternoon traffic counts in a growing residential population and daytime population. Retail is driven by and always follows residential and other market demand drivers. If it’s a growing or existing retail node, all the better – that’s a sign of a potentially good investment.
Also, consider who you’re working with. Metro Commercial has a long history of representing both retailers and owners and can leverage existing relationships to help clients dispose of or unlock value and take it to the market to sell. Retailers like Advance Auto Parts rely on our expertise to help recapitalize and monetize their existing real estate because we know the retail landscape in a way that a traditional triple-net sales broker often doesn’t.