Why are STNL Investments So Popular

In recent years Single Tenant Triple Net Leased (STNL) investments have become very popular investments.   This was partially due to higher yields and relatively lower risk associated with alternative investments, whether in the bond/mutual fund market, or other types of real estate.  These types of investments are characterized by longer lease terms typically between 10-20 years, with options for the tenant to stay at the location for another 10-20 years.  This, as well as stable positive, and known cash flow from commercial (and sometimes credit rated) tenants, coupled with ease of management has increased their popularity.  Usually all maintenance, repairs and bills, including taxes and insurance, are coordinated and paid for by the tenant making for an easier to manage asset.

Due to this we have seen many investors in recent years who either lack time, commercial real estate experience or  are just tired of having money not earning any interest enter into this market.  Of course, like anything else, as demand goes up, typically so does the price.  In fact over the last three to four years, we have seen a compression in the capitalization rates of almost 200 basis points in many areas.  Which brings to mind, what will happen as interest rates, and therefore, other competing investments offer more favorable returns.

With economic uncertainty looming, coupled with tightening lending standards, poor retail news, bankruptcies/store closures and the uncertainty of the political climate have certainly impacted the retail investment market, but due to the tenancy nature many are considered recession proof,  (fast food, drug stores, Urgent Care Centers, Dialysis location/specialty medical and grocery stores). Many of the STNL tenants in these markets have remained relatively strong during down economic times, especially in submarkets located in major metroplexes.  Additionally, with the long term leases, come set rental increases, these can act as a hedge against inflation and down economic times, when rents typically go down for other asset classes.

What is driving the strength in these markets?  Well, STNL investments are definitely considered one of the safer and one of the most liquid forms of real estate investments.   Additionally, and one of the key factors, is still the law of supply and demand.  We’ve already talked about demand, well the other factor is supply, and in in-fill areas supply is limited, therefore keeping upward pressure on pricing.   Will this change in the near future?  I don’t really see it changing quickly in the immediate future, and it will probably be impacted slower than other asset classes with a downturn in the economy.  With the longer term leases in place and set increases in rental rates, an investor will know going into a purchase of a STNL what they can expect as a return even if we do see another 4-7 year downturn.  

For more information on STNL investments or how to get started investing in STNLs, email info@CBICommercial.com