For example, the curve balls in recent years, such as inflation, outsourcing, the pandemic, the resulting recession, and online shopping, have created numerous challenges or required them to jump through excess loops. As a result, this has caused retailers to take a closer look at how they conduct business and make changes that are best suited to today’s consumer demands. So let’s examine the significant NNN retail deals to keep an eye out for in 2023. So let’s examine the significant NNN retail deals to keep an eye out for in 2023.
The Impact Of Interest Rates
When the interest rate increases, something typically decreases. In 2022, an upward trend in interest rates pushed investment capital out of the market. The result was a severe dip of 72 percent compared year-over-year to November 2021. The expectation is for an even harsher decline when December figures are released. However, there may be a silver lining when expecting cap rates to climb over the next 12 months. As a result, this scenario creates the perfect conditions for what Josh Bishop calls “lucrative” buying opportunities. Bishop is the SVP and director of single-tenant net leasing at Matthews Real Estate Investment Services.
2022 Was A Tough Year In Retail
Bishop said severe impacts affected the single-tenant net lease market across the entire sector last year. With property values dropping 10 and 15 percent from January 2022. “It has been a rough year.” The decline was the direct result of an increase in interest rates and a jump in cap rates that soon followed.
The result was the end of most 1031 exchange funds. This outcome also signaled a dip in retail transaction volumes as 1031 exchange purchasers usually drive them. Bishop says there has been a trend developing where increases in cap rates for retail tenants have occurred across the board, but there are certain instances where the most significant jump occurs. They have appeared at strip malls, shopping centers, and several big box retailers.
Some Retailers Are Doing Fine
As reported by Pharma Property Group, discount retailers and dollar stores are weathering the storm. As a result, they have been outperforming the broader retail market by comparison, attracting a lot of investment activity. Bishop explains, “Historically speaking, these tenants have been able to thrive in times of economic prosperity and economic hardship, so we will see investors continue to favor these assets.”
Numbers to back that up include a net sales increase of 11.5 percent at Dollar General and an increase of 8.1 percent in net sales for Dollar Tree. These increases were recorded in Q3 of 2022 and are good enough to get the attention of investors. In addition, another advantage to these retailers is that dollar stores offer investment-grade credit behind their leases. Other outperformers over the past year include Walmart, Tractor Supply, 7-11, Chick-Fil-A, and Kroger.
Bishop says that these assets will continue to perform well into 2023.
2023 Presents Excellent Buying Opportunities
The challenges the triple net retail sector faces now will likely last for some time. However, according to Bishop, this will lead to excellent buying opportunities for investors just waiting for the right time to pounce on the market. He says he has been telling clients to hold on for now as there will be opportunities soon.
Bishop adds, “Investors are remaining patient and standing by for more lucrative buying opportunities,” He adds that he is confident that the industry will show better buying opportunities in the coming year. That is, provided nothing drastic pops up to throw a monkey wrench into the works.
Market Conditions Are Assisting
Distress in the current market slowly creates perfect opportunities. Bishop points to economic pressures that may push investors to sell. These market conditions are prevalent as loan or lease terms come due. Renewal time is often one of the best times for investors to move. However, being patient comes with its own best rewards. Bishop says that he knows that “smart money is waiting on the sidelines, ready to strike.”
Again, online shopping, inflation, sourcing, the pandemic, and the resulting recession have increased the challenges the triple net retail sector typically faces. Also, it has forced retailers to adapt to survive the changes in the marketplace. As the market struggles, it creates a good atmosphere for investors.
Plus, not all retailers have had a rough year. There have been several strong performers that have managed to navigate the challenges. These successful retailers have attracted the attention of investors waiting for the right opportunity to surface. Experts claim it is only a matter of time before buying opportunities improve. Therefore, expect opportunities to happen sometime in 2023.