Furniture Stores Provide a Bright Spot for Net Lease Investors

JLL's Matthew Berres and Scott Bailey discuss why the category is increasingly attracting net lease investors as the retail industry faces rapid change.

Matthew Berres, Senior Vice President and Scott Bailey, Associate, JLL
Matthew Berres, Senior Vice President, and Scott Bailey, Associate, JLL

It can be tough to find attractive net lease opportunities in the marketplace right now. Many investors ask the question “What can I buy if I sell my property?” While there’s certainly no one-size-fits-all answer to that question, there is one industry in particular that has flown under the radar of many investors: furniture stores.

Big-box retail gets a bad reputation. Sam’s Club, Macy’s, Sears, K-Mart, Bon-Ton, Gap, Ann Taylor, Loft, Dress Barn, Lane Bryant, Justice and several others have already announced store closures in 2018. But as departments stores, clothing stores and even grocery stores have lost market share to pure-play, e-commerce retailers, furniture stores seem to remain insulated from the e-commerce threat that has taken down so many of their brick-and-mortar counterparts.

In 2017, both Art Van Furniture and WG&R Furniture executed sale leasebacks with STORE Capital, LCN Capital Partners, VEREIT and Broadstone Net Lease, demonstrating the appeal of the sector to net lease investors. There are currently 10 long-term net lease furniture stores on the market, with lease terms of 20 years (with the exception of one with 13) remaining that have average asking cap rates of 6.9 percent. Compared to many of the other retail opportunities on the market with lower cap rates and less term, these leases and credits can be fairly appealing.

In addition to the real estate capital markets positive outlook on the sector, the public equity markets are bullish on the future of brick-and-mortar furniture stores as well. American Woodmark, La-Z-Boy, Restoration Hardware and Basset Furniture have all seen positive stock growth in the last 12 months, with the majority of gains coming in the last six.

Housing sector support

It makes sense that the furniture space is seen as a rare safe bet in the retail space right now, given the status of the housing market. The S&P CoreLogic Case-Schiller US Home Price NSA Index, covering all nine U.S. Census Divisions, reported a 6.4 percent year-over-year gain in home prices, three times the rate of inflation, driven primarily by low inventory and increasing sales. Additionally, the new tax plan, which allows deductions of pass-through income and lowers the corporate tax rate, could spur residential construction, which lagged in 2017.

While the housing market may be a good indicator of the furniture sector’s future performance, the largest concern for investors is e-commerce. Furniture has traditionally been a tricky product to sell online. It’s difficult to ship, and buyers want to touch and feel the furniture before they buy it. E-tailers are working on this, however. Companies like Target have released private label furniture brands. Wayfair has built its entire business on the premise of selling furniture and home goods online.

It’s no secret that retail is changing. Industries like sporting goods, department stores, pharmacies and clothing stores are being forced to reinvent themselves to meet the changing consumer preferences for product and experience. Investors do, however, need a place to invest money, and right now the furniture industry seems like a rare bright spot in what has become a dark investment world for retail.