In the New Normal, Investors Must Fly to Safety
- Apr 15, 2020
This might be an understatement, but 2020 is shaping up to be a very interesting year. We’ve only just begun the second quarter, and most of us are already worn out. And we haven’t even gotten into the thick of the presidential campaign season. Fun times, indeed!
In the midst of all this chaos, it’s important for all of us to get back to basics. For investors in commercial real estate, that means opportunities that provide long-term stability and the potential for growth. From my perspective, no investment types deliver on that promise more than net leased properties. On the risk-aversion scale, they are the closest thing to a sure bet–just what the doctor ordered.
And sure bets are what we need, as we face the serious potential of a pandemic-induced economic downturn. If we were to let only the daily news guide our decision-making, we would become immobile. Already, unemployment has leaped from its record single-digit lows (the rate was 3.6 percent in January, according to the Bureau of Labor Statistics).
“In March, the unemployment rate increased by 0.9 percentage point to 4.4 percent,” according to the BLS reports. “This is the largest over-the-month increase in the rate since January 1975, when the increase was also 0.9 percentage point.”
The general thinking now is that the trend will continue. How much is a matter of what source you turn to. The New York Times is speculating that it could actually hover around 13 percent—the highest rate since the Great Depression–and JP Morgan pushes that to a staggering 20 percent. The number of new unemployment claims has reached nearly 17 million, and the economists say that number could grow to 25 million this month.
What will this mean to the GDP? Some economists are pointing to a 30 percent drop during the second quarter. Reports are coming in recording a significant fall in the number of commercial rents that are being paid (by as much as 25 percent) along with a spike in requests for rent relief. Somewhat surprisingly, multifamily rents so far seem to have hit only a slight dip, although reports from the field predict that will rise shortly, given the unemployment condition.
What is not surprising is that, in the face of such dire projections, investors are rethinking previously aggressive strategies and pulling in their talons. However, we hold to three essential facts. First is that the COVID pandemic will not last forever. Second is that reason and safety are called for in the midst of this crisis but never panic.
And with that in mind, our third truth is that there are opportunities to be had in investment strategies that offer much less risk. Namely, as I said at the top, net lease.
Drilling down into specific verticals within the net lease space, creditworthiness becomes the watchword. Investors are dealing with such names as Starbucks, 7-Eleven, Wawa, Walgreens, AutoZone and O’Reilly Auto Parts. We’d call your attention particularly to convenience stores, especially when they have a gas-service component, to the auto sector, pharmacies and groceries as the strongest performers with the most attractive performance for gun-shy investors. All of these verticals come as close as any investment to the long-term stability we’re talking about.
Needless to say, no investment type is without its risks, and as we have seen, macro forces beyond our control can always threaten aggressive investment activity. However, in times of uncertainty, there are options that can offer much-needed forward movement. Clearly, net leased properties are at the top of that list.
Jonathan W. Hipp, a principal at Avison Young, recently joined the firm to lead its U.S. net lease efforts. Hipp was formerly the CEO and founder of Calkain Cos.