Limon Net Lease Group

Archives for October 2023

1031 Exchanges | Three Best STNL Segments

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The Single Tenant Net Lease (STNL) market is a popular choice for investors who want to defer capital gains taxes by using a 1031 exchange. A 1031 exchange allows investors to sell one property and reinvest the proceeds in another property of like-kind and equal or greater value, without paying taxes on the sale. However, not all STNL properties are created equal. Some segments of the market offer more advantages than others, depending on the investor’s goals, risk tolerance, and preferences. The Limon Net Lease Group’s opinion of the three best segments of the STNL market for a 1031 Investor: automotive sector, quick service restaurants (QSR), and drugstore sector.

Quick Service Restaurants (QSR): The primary QSR investors continue to be private 1031 exchangers who are selling their more management-intensive real estate, like multifamily assets, and trading into passive net lease investments. STNL QSRs are fast-food or casual dining establishments that offer low-cost and convenient meals to their customers, including Chic-fil-A, Starbucks, and Chipotle.

Automotive Sector: The single tenant net lease (STNL) auto sector is a segment of the commercial real estate market that consists of various auto related tenants in the parts, service and collision sectors including Advance Auto Parts, Caliber Collision, and O’Reilly Auto Parts. These tenants typically operate on long-term leases with rent escalations and absolute net terms, meaning that they are responsible for all operating expenses, taxes, insurance, and maintenance.

Drugstores Sector: The Retail Pharmacy sector has been considered a “safe” investment sector for investors and 1031 exchange buyers for many years. The two companies dominating the retail pharmacy investments are Walgreens (NYSE: WBA) and CVS Pharmacy (NYSE: CVS). These companies have both been very active in strategic mergers, acquisitions, and updating their brick and mortar footprint.

Each sector above can be an exciting investment for your 1031 exchange. Some of the advantages include:

  1. Reliable Cash Flow: STNL tenants often have reliable cash flows, which are attractive to investors. This reliability is due to the essential nature of services, which remain in demand regardless of economic conditions.
  2. Longer Lease Terms: STNL tenants typically sign longer leases, providing investors with a predictable and steady income stream over an extended period.
  3. Triple-Net Lease Structure: Many automotive, QSR, and drugstores operate on a triple-net lease structure, meaning the tenant is responsible for property taxes, insurance, and maintenance costs. This structure minimizes the landlord’s expenses and management responsibilities, making it an appealing low-maintenance investment.
  4. Investment – Grade Credit Rating: Many tenants occupying the STNL space are investment-grade credit ratings which makes them highly desirable tenants for a passive investor as they are less affected by economic downturn and online competition.
  5. Resilience During Economic Downturns: These three sectors have demonstrated resilience during economic downturns. For instance, during the COVID-19 pandemic, while some sectors struggled, the automotive sector remained stable due to its essential services. QSR’s with drive thru service thrived allowing consumers to social distance as an e-commerce resistant business. Drugstores, as an essential retailer, remained paramount to providing consumers access to necessary commodities.

In conclusion, the STNL automotive, QSR, and drugstore sector is a lucrative and attractive segment of the commercial real estate market for investors who are looking for low-risk and high-return opportunities. By investing in these sectors, investors can enjoy stable cash flows, strong credit tenants, resilient and adaptable properties, and diverse and segmented subsectors.

 

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or legal advice. It does not constitute an offer, solicitation, or recommendation to purchase or sell any investment, security, or other financial instruments, nor does it represent any form of professional financial or legal advice. Always seek the advice of a qualified financial advisor, attorney, or other appropriate professional with any questions you may have regarding your personal financial and legal circumstances. Prior to making any investment decisions, please consult with the appropriate professionals to ensure that you understand the risks involved and take into account your unique circumstances.

How Does the Housing Market Impact CRE

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WHAT SINGLE-FAMILY HOUSING MARKET TRENDS MEAN FOR CRE​?​

Elevated Mortgage Rate Restrains Home Sales​

  • Single-family mortgage rates have climbed to the 8% range, reducing home sales to lowest level in over a decade​
  • Elevated home prices have significantly reduced housing affordability​

Impact is Bigger Than Just Housing Markets​

  • Home sales historically comprised an average of 4.5% of U.S. GDP, a significant amount nationally​
  • Home sales affect multifamily, retail, self-storage and industrial properties in unique ways​

What This Means For Investors​

  • Affordability gap between owning and renting has surged to a new peak​
  • Dramatically higher home prices and mortgage rates are likely to support multifamily demand​
  • A home sales revival will require a substantive reduction of interest rates – much will depend on the Federal Reserve, Quantitative Tightening and Federal Treasury Issuance.​

*Through September​
Sources: Marcus & Millichap Research Services, National Association of Realtors​

Watch the Video Below

 

What’s Driving the 10-Year Treasury Rate Surge

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WHY ARE TREASURY RATES CLIMBING?
​WHAT IT MEANS FOR CRE LENDING?​

Higher 10-Year Treasury Rate Impacting Lending​

  • The 10-year treasury rate climbed about 120 bps in the last 100 days, applying upward pressure to CRE lending rates​
  • Single-family mortgage rates have climbed above 8%, reducing home sales to its lowest level in over a decade​

What is Driving Treasury Yield Movements?​

  • The Fed began the process of selling off securities in 2022, reducing the price of securities while raising the yield ​
  • Compared to the 10-year average, the U.S. issued triple the amount of debt over the last 6 months​

Eyes On Congress To Avoid Credit Downgrade​

  • If the government can avert a shutdown, the U.S. credit rating should remain stable and limit upward pressure on treasury and lending  rates​

*Through October 11​
Sources: Marcus & Millichap Research Services, Federal Reserve​

Watch the Video Below

 

What’s Holding Sidelined Capital Back

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HOW MUCH CAPITAL IS WAITING FOR MARKET STABILITY?​

Market Could Heat Up Once Capital Is Deployed​

  • With institutions holding over $200B to invest in real estate, the total quantity of dry powder likely is above $300B​
  • This capital is being limited by the number of listed properties and uncertainty surrounding interest rates​

Fed Signals Rates To Be “Higher-For-Longer”​

  • The Fed signaled that those who are waiting for significant rate cuts may wait longer than expected​
  • New projections show the Federal Funds Rate is expected to stay around 5% until after the end of 2024​

Sidelined Capital Waiting To Rush Back Into CRE​

  • As the market gets time to adjusts, the expectation gap between buyers-and sellers will narrow​
  • Sidelined capital will return to the market and amplify deal velocity once buyers and sellers’ expectations calibrate​

*Sources: Marcus & Millichap Research Services, Goldman Sachs​

Watch the Video Below

 

CRE Performance Over the Last Ten Years

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10-YEARS SINCE MARCUS & MILLICHAP HAD OUR IPO​, WHAT’S CHANGED FOR CRE MARKETS SINCE 2013?​

Most CRE Delivers Higher 10-Year Return Than Alternatives​

  • Multifamily, industrial and self-storage properties have delivered strong value appreciation over the last ten years.​
  • If investors factor in the tax benefits and cash flow offered by CRE, the returns increase​

Over The Next Decade, Numerous Economic and Demographic Forces Will Support CRE Results​

  • While the landscape has changed and the numbers will be different in 2033, Commercial Real Estate’s long-term potential remains promising​
  • The economic trends of today will shape what assets record the strongest growth moving forward, so investors should track long-term shifts in the market

*Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc., Federal Reserve, Standard and Poors​

Watch the Video Below

 

5 Potential Risks that Could Derail a Soft Landing

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WHERE IS THE REMAINING RECESSION RISK COMING FROM IN 2H 2023?​

Soft Landing Grows Increasingly Likely​

  • Goldman Sachs’ cut their estimated likelihood of a recession to just 15% in September​
  • Both August inflation and labor market data supports the idea that a soft landing is plausible​

Eyes Are On Consumer Spending and The Banks​

  • A pullback in consumer sentiment combined with the resumption of student loan payments could reduce discretionary spending significantly​
  • Companies face the same financing challenges as CRE investors, potentially limiting corporate spending once business loans are renewed​

2024 Forecasts Expect No Recession Will Occur in 23/24​

  • Most economic forecasts are projecting GDP growth near 2% in 2023, and near 1% in 2024​
  • Slow but stable growth is exactly what the Fed wants, and would reduce upward pressure on interest rates​

*Sources: Marcus & Millichap Research Services, Goldman Sachs​

Watch the Video Below

https://youtu.be/Rtq0uBTjiA4–/