After more than a year of turmoil thanks to the COVID-19 pandemic, investors are ready to sink their dollars into net lease assets. And they might be doing this at a brisk pace.
That’s the good news from Randy Blankstein, president of Wilmette, Illinois-based The Boulder Group.
Blankstein will be one of the many net lease pros from across the country speaking during the seventh annual National Net Lease Summit being held by REjournals Sept. 30 at the University Club of Chicago.
Midwest Real Estate News recently spoke with Blankstein about the state of the net lease market. Here is some of what he had to say.
The pandemic hit plenty of commercial sectors hard, but some thrived during the last year-and-a-half or so. What net lease property types are investors most interested in today?
Randy Blankstein: There is no question that industrial is a favored asset class and that ecommerce is still gaining market share. The question becomes, how will the properties this effects the most – the big-box retailers, mostly – adapt? Most of the businesses that have made it this far through the pandemic will most likely survive. But what steps will they take to improve their business models? How will they get their omnichannel strategy correct?
These retailers need to settle on the right number of properties and the right size for each of them. We are seeing this play out in the banking sector right now. Mobile banking has caught on dramatically. What is the right size for a branch and how many branches do banks need? That is the open question, given that a certain number of people will rely on mobile banking and might not ever walk into a physical branch.
That does seem to be a conversation that many retailers need to be having.
Blankstein: A lot of retailers now have different concepts, some larger stores, some smaller ones. What is the right number of stores for them to have? Are certain businesses more immune to ecommerce? Dollar stores are in a very aggressive expansion phase right now. Is that business model not impacted by ecommerce? It seems not to be. Most people want to pick up those convenience items when they are on their way home from work or they are out running errands. They don’t plan out shopping for those items three days out and order them online. The dollar store model, then, is more resistant to ecommerce than most others.
The quick-service-restaurants are rethinking their locations, too. They realize that they need drive-throughs, so they might not want to be in strip malls any longer. Dunkin’ and Panera Bread are moving out of strip centers and opening locations that can offer a drive-through. And these restaurants aren’t just thinking about whether they need a drive-through, they are wondering whether they need two, one for customers and one for the delivery companies like Door Dash and Uber Eats.
Another big issue facing the net lease sector is the future of 1031 exchanges. There is some fear that the current presidential administration wants to eliminate or modify this program. Are you concerned about this?
Blankstein: This is actually a bigger concern now than COVID. Most people think COVID for the most part is in the rearview mirror. Most people are expecting COVID to be mostly done by the end of the summer. People are now onto the next thing, and the next thing is Pres. Biden’s tax plan. A component of that plan is the elimination of 1031 exchanges.
I don’t think 1031 exchanges will be completely eliminated, but I certainly do think modifications are on the table. The only way it gets eliminated, I think, is if it gets wrapped up in a much bigger tax bill. If everything is pushed through verbatim, elimination is possible. But if it gets focused on separately in its own hearing, there will be a great pushback from the real estate industry.
One of the modifications I’ve been hearing is that maybe up to $500,000 in an exchange will be exempt from capital gains taxes, but any amount over that in a sale won’t be. Or investors might be limited to doing just one 1031 exchange a year.
The hope is that if 1031 exchanges are targeted they’ll just be modified, not eliminated. That is the most probable outcome. It’s too early to know right now. There is no actual bill or debate right now. There is a lot of time for things to change.
You mentioned that the worst of COVID is hopefully behind us. How is the net lease industry faring now as COVID recedes?
Blankstein: There are still a lot of questions. Do gym memberships come back to 100 percent or 90 percent of 2019 levels? Do people come back to movie theaters or have they developed the habit of relying on streaming services? It’s a question of which habits people developed during the pandemic will stick and which will not. Do movie theaters, gyms and other places come back to where they were previously? That’s the open question.
So, does the future look bright for net lease?
Blankstein: There will be more activity in this segment, no question. There are a few trends helping the net lease segment. There is a global search for yield. People who have under-saved for retirement are looking for fixed income. You can double your income by moving to net lease REITs. There is a huge group of Boomers looking for fixed income to help during their retirement years.
There are a lot of investors who are looking for free-standing locations. Net lease properties are the beneficiary of enclosed malls closing and downsizing. A lot of mall-based tenants are leaving their enclosed malls because of a lack of traffic and are moving on to freestanding stores. The net lease segment is a good story at the moment, and it will continue to be so during the next six months to a year, at least.