By Walter Duke
Today I tuned into a great webinar moderated by Patrick Nutt, EVP, Market Leader, SRS Partners aptly named “The State of the NNN Market as the Industry Emerges From COVID-19” The panelists were Brian Mansouri, Senior Vice President, AR Global Gino Sabatini, Managing Director, W. P. Carey Ryan Cockerill, Vice President of Acquisitions, Agree Realty Evan Gower, Executive Vice President, and General Counsel, GBT Realty Corp. Karl Francetic, Founder & Principal, Realty Investor.
Still On Offense
After taking a pause to re-adjust operational logistics, all panelists confirmed they had plenty of capital, there is ample liquidity, and they all confirmed an active development pipeline. They acknowledged that lenders are coming back to the table, albeit for their best borrowers, and at slightly more conservative loan to values and rates. There is also more scrutiny given to potential tenants.
Tenant Behavior Matters
Lenders have long memories, and they remember how developers handled their business in the aftermath of the Great Recession years of 2007 to 2009. Those who misbehaved found it harder to get loans when the market recovered. Coming out of the COVID economic crisis, landlords and retail developers will have similar mindsets. Who paid rent? And how they handled their affairs. One panelist noted that they have recently passed on a few Starbucks deals because of their recent public response to their landlords. Conversely, those who paid or handled their crisis in a thoughtful professional way will be rewarded by developers, landlords, and lenders in the “new normal.”
Essential Business: The New Investment Grade NNN Asset
After the national shelter in place for the last two to three months, there is a newfound interest in essential businesses as retail tenants. QSR with a drive-through, tire stores, value retailers, grocers, banks, pharmacies, O’Reilly’s, c-stores, dialysis and the like are all in high demand due to their essential nature versus retailers like Party City or Ross Dress for Less.
Cash Flow Uncertainty Will Impact Cap Rates
Not long ago, very little or zero vacancy was projected for supposedly net lease credit tenants. However, based on their recent behavior and performance, that has changed, and the durability of net lease income is being reexamined. Moving forward, the market will likely determine that some minor collection or vacancy allowance or a slightly higher cap rate may be warranted when investing or lending on some net leased credit assets. As one panelist stated, “What used to be certain income per the lease is now not”.
Specialty Boxes Need To Be Adaptable
There was much discussion about how the value and underwriting of special use boxes like theaters and fitness centers will be measured moving forward. The consensus was the alternate uses will matter greatly. For example, one panelist noted that Lifetime Fitness has a plan to convert their fitness centers to a suburban office building, which is an advantage over their competitors since they will likely be easier to finance and sell.
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