In light of the new reality we are now living in, I felt it was appropriate to shake things up a little bit. With significantly more time for reflection, I’m going to commit to doing net-leased market reports every Monday morning. I welcome all of you to comment, debate or add dialogue. Please note, this report will be from my opinion, perspective and observations, take from it what you wish.
LAST WEEK (March 23-27th) – It may have been the most draining week I’ve had in real estate. Not really pertaining to the market itself, but for all of the uncertainties we are facing as Americans. Trying to protect loved ones, trying to figure out where to go, what to do, etc…unprecedented.
However, the week proved to be very positive to me too! It’s great seeing people rally together, people caring more, and people being selfless to provide goods and services the country needs now more than ever. Let’s trust that we can all make a difference to tip the scale on this virus and get back to normal living.
Brisky Net Lease Team. For those who don’t know, we are a Minneapolis based, national net lease team. Our team has responded very well to being apart and fully remote. In fact, I’ve seen tremendous focus, positive attitude and hustle out of all of them. It goes a long way in an uncertain market. I’ve always believed brokers show their “true worth” in challenging times. And, we’re up for that challenge!
Onto the market:
Our team made a shift to focus more time on Dollar General and Tractor Supply last week. Not to say these are the only two “in demand” tenants right now. These are two tenants that we’ve worked with a lot historically and have solid developer relationships with, which helps us access inventory. Although we put several units under contract, I honestly didn’t see a ton of cap rate deviation from the norm. Just a solid buyer pool and good confidence in advancing deals on these credits.
On Dollar General, to simplify, we’re seeing 6 to 7 cap rate ranges throughout the country right now. Yes, I know that is a wide range.
Sub 6.2 cap rate product on much of the West Coast, Florida, and certain very dense Northeast markets.
Sub 6.5 cap rates in Texas, many other urban Northeast locations, and other select larger communities with 10-mile populations of 50,000 or more (which goes against the grain of what DG specializes in, but they do exist).
The rest of the product has been floating between 6.5 – 7 cap rates, respectively. Note that these ranges are for full-term or nearly full-term 15-year deals.
Moving forward I think buyers will continue to pursue Dollar General in the upcoming weeks, and I believe non-developer sellers may even test the market some on the sell side.
We could witness some cap rate compression, but I don’t feel like it will happen. Mostly due to the spring/summer developer pipelines that will replenish the inventories and Dollar General shows no sign of slowing their new store growth.
As far as Dollar General as a company, I am a believer and supporter of DG. I see about 4 easy opportunities to shop at DG’s on my 2-hour trek to my Northwest Wisconsin cabin. They have clean stores, they handle a ton of products, and do a nice job of being convenient to people who aren’t located in urban markets. When it comes to DG and e-commerce, I do think they have an uphill battle to compete with Amazon and some of the others in this department. I have used them online before, and they do a decent job of making most of their products available.
In regard to Tractor Supply Co., certainly not as much product out there as DG, but plenty of demand. A mixed bag of opportunities, from new construction deals (15-year terms with 5% rental bumps), to 2nd generation 15-year deals in existing buildings with same term and bumps (From low $2M to $7M+). Cap rates ranging from mid 5’s to mid 6’s, in a wide range of markets and areas.
Second generation product offers an investor the opportunity to own a full term TSC deal for substantially less money due to the rents being quite a bit lower. So, a buyer of these must evaluate condition of the original building to make sure they’re comfortable.
Tractor Supply Co. as a company has made some great strides over the past several years. Their preferred developers have been buying around the country, filling out their growth models. In many cases their floor plans have decreased a bit in size, but they’ve focused on filling voids throughout the country.
From a consumer perspective, tools and feed/seed have been key focus areas at their stores. It remains to be seen how 2021 and beyond will be in terms of their store count growth, but signs here feel positive.
In regard to cap rates, I think last week has a lot of people on the sidelines. I expect this to continue for several weeks until we gain more clarity on when we can be safe in public again. Sit-down restaurants are paralyzed right now, as are movie theaters and anyone reliant on large public interaction.
With fewer active buyers, I suspect opportunistic buyers will test sellers’ appetite to discount. With cost of capital still very low, I don’t see a huge cap rate swings happening unless the “stay at home orders” increase to many months or more.
3 categories I like this week (And, I’ll try and change it up each week):
(I’ll stay away from the obvious companies doing well right now: Grocery stores, drug stores, dollar stores, Amazon, etc…)
– Solid Credit Furniture – With all of us at home indefinitely, I think we are all finding a new appreciation for things at home. So, companies who can do a great job managing the next several months and offering consumers a solid online + brick and mortar experience should do well.
– Discount Apparel – Burlington, TJX, Marshalls, Ross types. Even if stores are paused for a bit, value shoppers should return here.
– Auto Parts – O’Reilly, Advanced, etc. I think there will be a pause on some of the new vehicle buying for a bit, and these solid credit companies should do well. If cap rates adjust a little, it could make for some opportunity.
I look forward to the week ahead. The NNN world is fascinating to me and ever changing. I always welcome feedback, dialogue and the opportunity to connect.
Wishing you and yours health, safety and happiness.