Next year? It should be a big one for the net lease business. And if an effective vaccine is widely distributed in 2021? That could provide an even bigger boost for net lease investment, development and leasing activity.
That was the big takeaway from the sixth annual Net Lease Conference held Nov. 18 by Midwest Real Estate News and REjournals.com.
This year’s event was a bit different: With COVID-19 cases rising across the Midwest, the conference this year was held virtually. But the content was, as usual, strong: The biggest names in the net lease business participated in an all-day event, sharing their thoughts on the state of the net lease market, its bright future and the challenges it faces in a world still struggling with a global pandemic.
Ryan Severino, chief economist in the East Rutherford, New Jersey, office of JLL, kicked off the conference as the keynote speaker. He focused on the letter “K,” highlighting that the economic recovery from the recession caused by the pandemic will be a k-shaped one.
What does this mean? The country should be prepared for an uneven recovery. The diagonal upward line of the capital letter “K” represents the investor class, Severino said. This class isn’t exactly thriving, but it is already recovering, hence the diagonal line going up and not down. These workers are seeing their finances gradually but steadily improve even as the pandemic continues.
“We are hanging in there,” Severino said. “We maybe aren’t thrilled with what we’ve seen in 2020, but we have largely weathered the storm.”
Then there is the downward diagonal line of the “K”. This line represents those households that continue to struggle. These households might not own their own homes or invest in the stock market. Their financial health is on a downward trend during the pandemic.
The bottom half of the vertical line that forms the back of the letter “K”? This line represents those households that are truly struggling today. These households face severe problems such as housing and food insecurity. They’ll face even more challenges if eviction moratoriums are lifted.
“So we are facing a very uneven economic recovery,” Severino said. “And that uneven recovery is manifesting itself in retail and net lease real estate, too.”
Severino said that those retailers serving wealthier customers and those serving lower-income consumers — such as dollar stores and discount stores — are weathering the economic challenges posed by COVID-19. But those retailers in the middle, the mid-priced apparel stores or department stores? They’re struggling. Severino said that these retailers have made up more than a third of the retail bankruptcies the United States has seen so far in 2020.
“This isn’t new, though,” Severino said. “This was a trend before COVID. But the pandemic has only accelerated this trend.”
Retailers that continue to do well include home-improvement stores, home furnishing retailers, sporting goods providers, grocery stores and health and beauty retailers.
There was plenty of optimism, and yearning, for 2021 on the second panel of the event, the National Net Lease Market Overview. Randy Blankstein, president of Boulder Group in Wilmette, Illinois, served as the moderator of this panel, asking industry pros about how COVID has impacted their business and what the recovery in 2021 might look like.
Sitting on the panel were Gordon Whiting, head of net lease real estate for New York City-based Angelo Gordon; Brian Mansouri, senior vice president of investments at New York City-based Global Net Lease; Andres Dallal, executive director of investments with New York City’s W.P Carey, Inc.; and Aaron Baum, managing principal with One Family Property in Bloomfield Hills, Michigan.
Whiting started the discussion with some good news: 100 percent of Angelo Gordon’s tenants had paid 100 percent of their rent as of the Nov. 17 date of the conference.
That’s helped Angelo Gordon weather the pandemic. The company’s focus on industrial properties has been a boon, too, Whiting said.
“Our focus on industrial has proven to be quite good in terms of lessening the impact of COVID,” Whiting said. “Industrial will remain our focus going forward. Interest rates continue to be low. These industrial properties continue to be great investments and will remain that way.”
The pandemic hasn’t stopped Angelo Gordon’s ability to raise funds, either. Whiting said that the company finished funding its fourth dedicated net least fund at the end of September. The company raised $1 billion of equity for that fund.
“We were fortunate in that we had done a lot of in-person meetings before the pandemic hit,” Whiting said. “We also have a lot of repeat clients.”
Whiting said that he learned something interesting, too, while closing the fund: The virtual meetings that Angelo Gordon held throughout the process worked well. He predicted that even after the pandemic disappears, companies in the commercial real estate space will continue to rely on virtual meetings.
It just makes too much sense not to, he said.
“The need to travel to all these places to hold in-person meetings will decrease,” Whiting said. “The virtual meetings make it so much easier to keep your schedule. If you’re flying somewhere on a plane, the plane could be delayed. You might show up late to a meeting. The people you’re meeting with will probably still see you, but now the whole day has been messed up. With virtual meetings, you can maintain a schedule. I think we’ll see a sea change in this industry toward online meetings.”
Whiting also said that the brokers and other professionals at Angelo Gordon have actually increased their communication during the pandemic. That’s because the company now that most everyone is working remotely holds daily calls. In the past, employees gathered for meetings that were held just once a week.
“Now we have more people who have a better idea of what’s going on throughout the company,” Whiting said. “The daily calls have worked out well. We are fortunate that we have had a team together for a long time. This pandemic has shown that if you need to work remotely you can. You can do it and not have a major disruption.”
Mansouri, too, said that Global Net Lease’s business has remained solid during the pandemic. He said that rent collections have remained high.
This doesn’t mean, though, that the pandemic, at least in its early months, didn’t force Mansouri and his peers to change the way they did business. In March, April and May, Global Net Lease focused on communicating with tenants, trying to determine what steps the company could take to help these tenants get through the tough economic times brought on by COVID-19.
“We did spend an awful lot of time during the second and third quarters of the year tracking rents and talking to tenants,” Mansouri said. “A lot of positives came out of that. The relationships we’ve been able to build with our tenants have been a real benefit. Some of the conversations we had started with talk of potential deferrals and ended with our tenants telling us that when we come out of this pandemic they’ll be looking to do more business and they’ll want to work with partners like us.”
Today, Global Net Lease is seeing several tenants come to them eager to take advantage of the opportunities in the net lease space today. Mansouri said that many companies hope to increase their footprint by buying their competitors.
Mansouri said, too, that Global Net Lease won’t be making too many changes in its acquisition criteria in the first or second quarter of 2021.
“We have always focused on investment-grade and credit-quality tenants,” Mansouri said. “We are going to continue looking at industrial. We are not going anywhere on industrial. We might soften a little bit on office. Generally speaking, we will stay the course.”
Dallal said that W.P. Carey has relied on the relationships that the company had already built with clients to help keep the business coming during the pandemic.
“Having been in the market for so long, we have built good relationships with tenants and brokers,” Dallal said. “We are a known, trusted quantity. In an uncertain backdrop, no one wants surprises or false starts. We can provide a bid with a tremendous amount of certainty behind it. That is appreciated. There was definitely a bit of a setback in the early part of the year. Now we are trying to be aggressive and make up for lost time.”
W.P. Carey will for the next six months focus on industrial assets. The company will pull back a bit, though not entirely, on retail and office properties, Dallal said.
“With all the uncertainty, there is now a greater appreciation in the marketplace for the importance of structuring a deal properly,” Dallal said. “You know can point to tangible events showing why certain documents are required.”
And as for the future? Dallal is optimistic.
“We are seeing good opportunities across the board,” he said. “We are looking forward to building a good pipeline in 2021.”
Baum from One Family Property said that it’s important to not generalize about net asset properties today. It’s true that several retailers are struggling during the pandemic. But others are performing well. It’s unfair, then, to say that the entire retail industry is down.
Baum pointed to retailers such as Walmart and Costco that are thriving today. Grocery stores, convenience stores, pharmacies and other best-in-class retailers are also doing well today, Baum said.
“To say retail is not doing well isn’t accurate,” Baum said. “The top retailers are generating billions of dollars in revenue. They are on the offense. They aren’t putting their hands up in the air and saying they can’t handle this.”
Baum said that the top-quality, top-tier net lease tenants have remain strong during the pandemic.
“A variety of these retailers are doing incredible right now,” Baum said. “Yes, many mom-and-pop retailers are struggling. Those tenants aren’t doing so great. But to say that all retail is struggling? I can’t get on board with that.”
And next year? Baum is predicting a banner year in 2021.
“It will be a perfect storm,” Baum said