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:
- 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.
- Longer Lease Terms: STNL tenants typically sign longer leases, providing investors with a predictable and steady income stream over an extended period.
- 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.
- 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.
- 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.