A Brewing Storm for NNN Properties Presents Opportunity for Disciplined Investors

In a piece on WealthManagement.com, Richard J. Brunelli claimed that even before the Federal Reserve's significant rate hike on June 15, new investors were already abandoning the stock market and turning to triple-net-lease properties with tenants such as Dollar Tree, CVS Health, or Sonic Drive-In. This trend is accelerating as investors search through online listings to locate single-tenant assets available for purchase.

RJBCO, led by Brunelli, has developed a specialized "Retail Location Evaluation Checklist" based on their extensive 45-year experience. This tool is designed to assist investors in making informed decisions when acquiring retail properties. Unfortunately, Brunelli has observed a growing trend of investors disregarding crucial components of the checklist and purchasing properties with significant flaws that could potentially harm their investment in the near future.

It's a warning that experts are sounding amongst all types of real estate. In 2021 and 2022, investors took advantage of low-interest loans to purchase properties with underlying issues. However, these flaws will likely become more apparent soon when the properties need to be refinanced.

In a piece entitled "'Lucrative' NNN Retail Deals Are Coming in 2023," Kelsi Maree Borland reported that the retail industry, particularly the triple-net retail sector, has faced several challenges in recent times. The advent of online shopping, the global pandemic, and inflation have necessitated constant adaptation from retailers to meet evolving consumer needs. Currently, the sector is experiencing a decline in investment capital due to rising interest rates in 2022. As a result, transaction volumes plummeted by 72% year-over-year in November, with an anticipated sharper decline in December.

Despite the challenging times, Borland points to the benefits of having patient capital. According to Josh Bishop, SVP and Director of Single Tenant Net Lease at Matthews Real Estate Investment Services, "lucrative" opportunities for purchasing properties are on the horizon, even though cap rates are anticipated to increase over the next year.

Although Bishop is bearish on triple-net retail at the moment, he believes that investors who are prepared to take action will find excellent buying opportunities in the future. Bishop advises his clients to stay put and wait for better buying opportunities. The current market distress is responsible for creating these opportunities. As lease or loan terms expire, economic pressures may force investors to sell. Bishop notes that intelligent investors are waiting for the right moment to jump in.

Investors in the industry are eagerly anticipating more favorable buying opportunities shortly. To avoid repeating past mistakes, it is crucial to prioritize properties that serve the best NNN tenants for investment properties, establish (and stick to) strict criteria for property acquisition, and maintain a reserve of patient capital that can be utilized appropriately for favorable deals.

Refrain from considering these three essential principles over the past two years to avoid harm to numerous investors in the upcoming years. However, following these same principles can provide astute investors the chance to obtain exceptional deals soon.