Newcomers to NNN real estate continue to pay too much for lackluster assets at risk of losing their retail tenants; they need to stop relying on online listing info and instead weigh critical locational characteristics to avoid such blunders, advises Richard J. Brunelli
OLD BRIDGE, N.J., July 13, 2022 /PRNewswire/ — Inexperienced investors are running unnecessary risks as they bail on the stock market and flock to single-tenant, triple-net-lease properties, cautions Richard J. Brunelli, Chairman and Principal of R.J. Brunelli & Co., LLC (RJBCO), in an "Investment Strategies" column for WealthManagement.com.
Newbies’ overreliance on Internet listings is a big part of the problem, notes the veteran of retail real estate brokerage and investing, who founded Old Bridge, N.J.-based RJBCO in 1976. "All too often, they are buying properties based on prominent selling points in those online listings—price, credit, cap rate, rental levels and length of lease term—and failing to properly weigh critically important locational characteristics," he writes.
Brunelli’s July 5 column ("Newbies are Running Risks as They Flock to Triple-Net-Lease Assets") is a deep dive into the dangers of ignoring those locational characteristics when pulling the trigger on buildings tenanted by the likes of Family Dollar, Walgreens. and Dollar General.
For starters, many newcomers fail to appreciate the dangers associated with tenants vacating buildings once their lease-renewal dates come up. It is troubling, Brunelli writes, that inexperienced investors are buying triple-net-lease properties at low cap rates despite these assets having five years or less of remaining term on the lease. "Assuming that a tenant with a looming lease-renewal date will stay forever is a rookie mistake," he warns.
Online listings may not reveal undesirable locational characteristics such as difficult ingress and egress, poor visibility, sluggish vehicular traffic and changing demographics. These and other red flags may cause a retail chain to exercise its option to vacate that building in search of a more productive location. "Smart retail chains shutter anywhere from 5 to 10 percent of their least-productive stores every year," Brunelli observes.
In the 1,500-word piece, he also shares his 10-point rating system for evaluating another critical locational characteristic— site access. If a single-tenant, triple-net-leased building is on a corner at a traffic light, and customers can make a right in and a left out on both streets, it rates 10 out of 10, Brunelli writes.
The worst-case scenario? Single-tenant buildings on divided highways that require a shopper to drive past the site and make a U-turn to gain access. "Here the rating could range from zero to four based on how far people have to drive before they can whip the car around."
Retail investors also need to better understand potential sources of competition and cannibalization. Earlier this year, Brunelli recounts, a triple-net investor was looking to buy a new dollar store site on a busy retail corridor in Florida. When the investor learned that a dollar store of the same brand was just a quarter of a mile away, he almost balked.
The newer store on the investor’s radar screen had extraordinarily strong locational characteristics. The second, older dollar store was buried in the back of a sleepy strip center. "While having two stores located practically on top of each other might seem like a sign of problematic cannibalization, the locational characteristics told another story—with its poor visibility, traffic and access, that older store was headed for the chopping block," Brunelli writes.
And so the deal made sense after all.
Lastly, Brunelli encourages investors to pay attention to how well tenants are maintaining their properties. An online listing may not adequately reveal chronic problems with potholes, oil stains, parking lot striping , on-site trash and the like. "[L]enders require that such maintenance work be performed in a timely manner on properties which they hold as collateral," Brunelli explains. "If not, there may be adverse financial consequences to the property owner in the loan agreement."
While the column is full of warnings, it was not meant to discourage high-net-worth individuals from diving into triple-net investing, Brunelli notes. "These deals are popular for a reason: When rooted in a solid understanding of real estate risks and fundamentals, they yield healthy returns—even as bubbles in other parts of the economy are bursting all around them."
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SOURCE R.J. Brunelli & Co.