Single Tenant Net Lease Outperforms Retail in COVID-19

The State of the Commercial Real Estate Market in COVID-19.

Everyone, I had the opportunity to participate in three different webcasts this week. One of the Webcasts focused on self-storage. Another on multi-family. And the third webcast blended commercial real estate properties, office, industrial and retail. The questions from investors from across all three webinars were actually quite similar. And I’m going to share some of the most common ones with you right now. Now, the most common question was when things will get back to normal. And of course, I can answer that other than to say that the key ingredient to getting back to normal is a vaccine or a cure until we can actually eliminate the risks of spreading the corona virus.

I don’t think anyone really wants to go to a stadium and watch a sporting event. That said, we may start seeing a very limited re-engagement coming to a portion of our economy being turned back on one step at a time. But this will likely be a slow, cautious process. The next big question I received centered on rent receipts. Now there are a few issues here. Job losses are rising. Businesses are closing. And so some tenants just can’t cover their rent.

But there are other tenants who are choosing not to pay their rent. And that’s actually a bigger problem because it adds an additional burden on property owners. For the month of April. Rent receipts varied. I also have to point out that this is largely based on informal client feedback and not a specific study or survey, but for apartments, collections range between 90 to 95 percent. With a few notable exceptions for retail, collections ranged between 20 percent and 50 percent depending on the retail center composition and location.

STNL vs Retail

Naturally, single tenant retail with credit tenants significantly outperformed retail. Overall, retail center rec collections are more of an extended conversation where the companies that are tenants work out arrangements with the property owners and operators to restructure their agreements for office and industrial collections were generally north of 80 percent, with a majority of the issues being with smaller tenants. And again, there are extended conversations about restructuring lease agreements for the self-storage sector. Collections were higher above 90 percent. But many of the payments are directly charged to credit cards, so this could change in coming months.

The next big question centered on whether there will be opportunistic investment opportunities and or rising cap rates. Again, it’s hard to predict the future, but here’s a couple of thoughts. First, a lot of investors have dry powder despite the stock market correction and the risk of recession.

At the Issenberg Britti Group, NNN properties are trading with strong momentum. Talk to Michael Salafia to learn more about the opportunities coming to market by emailing michael.salafia@marcusmillichap.com.

CRE Investment Capital is Avialble

Many investors open 2020 with a lot of capital available in general. Underwriting on acquisitions through this cycle have been comparatively sound, with relatively low loan to values and valuations supported by generally strong rent collections. As a result, although there will be exceptions in very hard hit segments, it’s unlikely we will see a large wave of Oreo’s coming to the market. Of course, this will also depend on how long the pandemic runs and the severity of the recession that accompanies it.

But if the stimulus package gives the economy enough buoyancy to stay afloat and Congress delivers additional targeted assistance when needed, then the probability of seeing a significant wave of distressed sales is relatively low. There are certainly concerns and we probably still have a long way to go. But all things considered. The real estate sector is holding up pretty well, although investors have to remain focused on day to day operations and address the numerous issues that are emerging. We also have to remember that real estate is a long term investment.

So please keep your eyes on the horizon.

I’m talking to CRE investors every day, helping them overcome the COVID-19 challenges they’re facing. As brokers, we’re still making deals. However, given the current market conditions, our primary focus is advising our clients in order to provide guidance through these uncertain times. By collaborating, we’ll all see greater success in the long term.

Michael Salafia
National Retail & Net Lease
(786) 522-7134
michael.salafia@marcusmillichap.com

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