Investors Favor Internet-Resistant Net-Leased Assets

In an economic environment where e-commerce continues to encroach on brick-and-mortar retail, what types of tenants will stand the test of time? Transwestern Vice President Sade Ghorban explores this niche.
Sade Ghorban

Net-leased properties are becoming an asset class of their own, with investors on the hunt for passive, high-yield opportunities, even as the real estate market moves later into the cycle. The smart money, however, also is analyzing each tenant’s long-term viability and ability to withstand competition from e-commerce companies.

In the new economic environment, where retailers worry that Amazon or other e-commerce ventures will eat away at their market share, investors are looking for “internet-resistant” tenants that will stand the test of time. But what are internet-resistant business lines, and what brands are fitting the bill for investors in this niche?

Firms like Caliber Collision, America’s largest collision repair company, may have a business model that meets this prevalent investment trend’s acquisition criteria. After all, car owners can’t have their vehicles repaired online.

Another sector of net lease that is continuing to thrive is quick-service restaurants. For the first time, consumers are dining out more often than they buy groceries and eat at home. If this trend continues, quick-service restaurants will thrive and retain their desirability as tenants.

A budding trend catering to health-conscious diners has helped fast-causal concepts like Luna Grill, Tender Greens and Urban Plates to expand. Existing quick-service restaurants attempting to meet this demand are adjusting their menu items to stay competitive.

Investment criteria

Investors searching for net-leased investments prefer national credit tenants that provide corporate guarantees, ideally with at least 10 years of remaining term left on their lease, as well as minimal to zero landlord obligations. These investments are what some investors refer to as “mailbox money,” or a passive investment that generates regular lease income with minimal effort required from the investor.

Choosing the right location for this type of investment is a determining factor in the yield an investor can expect to obtain. For example, the main focus of an investor’s strategy may be to seek out internet-resistant medical users, such as memory care or skilled nursing facilities, strategically located in a region with a substantial Baby Boomer population.

As buyers and sellers continue to debate whether the economy has reached its peak, a plethora of dry powder is waiting on the sidelines to invest in commercial real estate. Identifying the appropriate tenant mix and staying ahead of market trends is critical for the success of any real estate portfolio.

The purchase of a net-leased investment property may seem straightforward and easy to grasp; however, the asset’s location and the choice of tenant, as well as the tenant’s ability to withstand ever-changing market conditions and trends, should always be at the forefront of the investor’s analysis.