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Investors Pour Into Net Lease Retail, Sending Cap Rates Down To Historic Lows

It may seem like an odd time for investors to jump into retail. But buyers flocked to net lease retail properties in Q1, intensifying competition and sending cap rates for the sector to a historic low.

Investors largely ignored high-end restaurants, gyms and the many other outlet types shuttered and bankrupted by the thousands during 2020. Pharmacies, dollar stores and groceries were favored, along with others ensured a steady stream of customers by the coronavirus pandemic.


"There has been a great demand for properties that have had secure, stable cash flow during Covid," The Boulder Group Senior Vice President John Feeney said. 

Fueled by that demand, cap rates in the single-tenant net lease retail sector sank to a median of 5.91% in Q1, according to a study by the Wilmette, Illinois-based firm. That's down from 6.25% in Q1 of 2020.

One reason the net lease investment market stayed robust is that the sectors hit hardest by the retail apocalypse, including mom-and-pop shops, interior mall tenants, dry cleaners and others, were not on the radar screens of net lease buyers.

"It's a tough time to be in the dry cleaner business, but these kinds of tenants have never played much of a role in the net lease space," Feeney said. 

Although the pandemic hurt Q1 sales at some drugstore chains by suppressing the cold and flu season, in 2020 the retail sectors for companies like Walgreens and CVS Health recorded strong sales. Revenue from CVS Health's retail segment rose to $91B, a 5.3% jump from 2019, according to a company report. In the last quarter of 2020, Walgreens reported its U.S. pharmacies brought in $27.2B, a 3.9% increase.

"Those guys have all done rather well," Feeney said. 

The Pick 'n Save at N77 W14435 Appleton Ave. in Menomonee Falls, Wisconsin.

Along with convenience stores and fast-food restaurants, these are among the properties pursued most energetically by net lease buyers, he added, keeping their cap rates below the national median. 

In Q1, cap rates for 7-Eleven, CVS and McDonald’s were 4.9%, 5.0% and 4.0%, respectively, according to Boulder's study.

Landlords of shuttered businesses largely feared selling their properties off while the pandemic raged, according to Feeney. That cut down the overall number of net lease properties hitting the market, further intensifying the competition for the healthy properties that were put up for sale. 

"It's well known what types of tenants are trading," Feeney said. "People have held off on selling properties with cinemas, fitness centers and upscale dining."   

Overall net lease transaction volume in 2019 was more than $80B, a roughly 35% increase over the 2018 total, according to Boulder, and that momentum continued into 2020’s first months until Covid sent a shock through the market in mid-March. Transaction volume in 2020 ended up 11% lower than the record amount recorded for 2019. 

"No one is bringing out an AMC movie theater, because no one expects any buyers," Feeney said.