Though sales of net lease properties fell in the first quarter, it wasn’t for lack of interest, according to Richard T. Murphy, senior vice president of the US Capital Markets Net Lease Group at Avison Young.
“A lot of the institutions are out there still looking for product,” Murphy says. “A lot of people raised a lot of money. There was a lot of money raised this year to go out and take down a lot of deals. That money’s still out there.”
What will change, according to Murphy, are return expectations. “But I still think that there’s still fairly healthy demand out there,” Murphy says.
The one issue for would-be buyers is debt. While apartment owners have Fannie Mae and Freddie Mac for liquidity, net lease landlords rely on banks.
“Even though interest rates are at generational lows, the access to debt right now, even for good deals is a little hard to come by because a lot of the banks are really focused on the PPP program,” Murphy says. “So even though they might want to be lending on these types of deals, their focus is elsewhere right now.”
Murphy has heard that some credit unions are trying to do net lease deals. “They are very active right now trying to do deals that otherwise may have just gone to banks,” he says.
Randy Blankstein, president of The Boulder Group, says “credit unions have picked up slight market share but not significant enough to make it a real trend yet.”
Demand for net lease properties won’t be uniform. Murphy sees durability in pharmacies, grocery stores, convenience stores and quick service restaurant concepts.
“It’s going to be higher for those sectors that are still open and probably less so for some of those other ones that are going to be struggling,” Murphy says. “That will get reflected in terms of cap rates.”
Daycare centers, medical practices and fitness centers are probably going to trade at higher cap rates in six months.
“It will be a different world,” Murphy says. “Maybe there will be some consolidation, but people are going to go back to the gym. People are going to be taking their kids back to daycare. People are going to go back to their physical therapist. People are going to go back to their chiropractor.”
Murphy also predicts that the big box stores will survive. “If you look the Best Buys, I don’t see something like that going away,” Murphy says. “They’re kind of the last man standing in the electronics superstore space. I don’t see them going anywhere.”
If a retailer has been flirting with trouble for a while, the economic fallout from COVID-19 will likely force them into bankruptcy and out of business, according to Murphy.
“There are definitely a lot of retailers who will finally go away,” Murphy says. “So there’ll be some of that. But in the single tenant space, I’m not really sure what tenants would kind of fit into that. I don’t know that we’re going to lose any single tenant concepts, but maybe there will be some consolidation.”
