While the impact of COVID-19 economic disruptions imposed on investment real estate will not be fully known until we have a successful vaccine and have moved well beyond the pandemic’s shutdowns, there is one segment of the industry that we would like to highlight that continues to perform quite well.
Necessity retail properties include grocery stores, drug stores, hardware stores, and convenience stores, e.g., Dollar Stores that have generally fared well during the pandemic and have escaped being impacted by mandated lockdowns. Indeed, many of these retailers have experienced a surge in demand from customers who have rushed to stock up on critical items to avoid running out should conditions worsen.
In addition to benefitting from demand drivers, this class of properties is attractive to many investors due to lease terms that typically require the tenant to pay not only rent, but also a portion or all of property expenses that would usually be paid by the owner or landlord. Those expenses include maintenance, repair, utilities, insurance, and taxes.
Exactly which and how many of those expenses are the tenant’s responsibility, determines how the industry categorizes the lease:
- Single Net Lease (N) – tenant pays property taxes and rent
- Double Net Lease (NN) – tenant pays property taxes, building insurance and rent
- Triple Net Lease (NNN) – tenant pays all expenses and rent
For investment property owners who are tired of the responsibilities of managing a property and all the headaches that go along with that, net lease investments can be attractive options when using a 1031 Exchange. But the benefits do not stop there. Net lease properties are often sought out by many investors – especially during periods of market volatility and economic uncertainty – because they are widely perceived as:
- Stable sources of income due to the investment-grade quality of national or corporate tenants
- Effective hedges against inflation due to the fact most leases have built-in rent escalations
- Durable long-term investments because leases are structured with 10-year terms or longer
Conversely, investors considering net lease properties should recognize these investments are generally dependent on the performance of a single tenant. If that tenant defaults or decides to relocate, it may prove challenging to find another. And once found, the new tenant may ask for significant improvements requiring additional owner investment.
This class of real estate also is subject to fixed term leases which decline year by year thereby potentially increasing lease renewal risks which could impact property values.
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While certain investment property types like hospitality and office have felt the pain of the COVID economy more than other types, necessity retailers like CVS and Walgreens which offer omni-channel experiences (e.g., order online and pick-up curbside or drive-through) provide the safety and conveniences consumers expect today, especially with essential needs like prescriptions.
The same holds true for large anchor grocers which can limit the number of shoppers to comply with coronavirus safety precautions, but also provide pick-up and delivery services. Other retail business that fit the “essential need” description include auto and equipment suppliers like Advance Auto Parts and Tractor Supply Company.
And finally, home suppliers like Lowe's or Home Depot are considered necessity retail and have remained open and continue to perform well for investors.
So, when you evaluate your real estate investment options as we work our way towards an economic recovery, you might be wise to consider including necessity retail as part of your overall asset allocation strategy.
Do not hesitate to contact us at info@firstguardiangroup.com if you would like to learn more about necessity retail or net lease investment opportunities.
Disclosure: DSTs, like all real estate, have risks, including illiquidity, potential for loss of property value, costs and expenses that could offset the benefits associated with tax deferral, and reduction or elimination of monthly cash flow.
Disclaimer: There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the investments. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.
This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.
Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.
IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation.
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