We reported in March about the positive dynamics in the net lease sector of commercial real estate.
A new Marcus & Millichap report on this year’s first half further backs up that sentiment. It says that despite the growth in online retail sales, there is still plenty of shopping being done at physical stores. There was a 4.3 percent increase in overall retail sales in 2017, spurred by the best holiday season since 2011, and Internet purchases are still a small portion of that. This year, retail sales are expected to rise further, to 4.5 percent.
Additionally, Marcus points out that though store closure announcements get most of the attention, there were far more openings than closures, with 4,000 in 2017. Many of these are in the dollar-store sector, which is one of the biggest net lease categories. Meanwhile, the report says that retailers such as Best Buy have successfully adapted to online shopping and are closing less stores as a result.
The reason for this success seems to be largely macroeconomic. Business and consumer confidence are both reportedly up, due in part to tax reform measures that have led to employee bonuses, Marcus said.
On the investor end, the fear that the 1031 tax deferral would come to an end never came to fruition as part of tax reform, cementing confidence in the net lease sector. However, there is very little development taking place as a result, partially, of rising interest rates and foreseen metal tariffs. That is helping absorption, rental rates and other property fundamentals because when stores do close, they are usually being filled up in the net-lease realm. However, there is still some lending trepidation as a result of hesitance about perceived risk in the sector, which has taken place since 2016.
Meanwhile, Realty Income, the largest net lease REIT with just over 5,100 assets, had strong year-end financial results. Fourth-quarter revenue was up eight percent from the same year-ago period, hitting $310.7 million. For the full year, net income hit $301.5 million, up from $288.5 million the prior year. Revenue was up 10.2 percent for the full year. Realty Income’s rents were up one percent over 2016, with a portfolio that is 100 percent leased, so the firm is a strong example of the success that is taking place in net lease retail.
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GRS Group is a leading provider of commercial real estate (“CRE”) services worldwide. With offices across the United States, Europe, and affiliates around the globe, GRS Group provides local market knowledge with a global perspective for institutional real estate investors, occupiers and lenders worldwide. The GRS Group team has evaluated and advised on over $1 trillion in CRE transactions.