Triple-net (NNN) leased retail properties have long been favored by commercial real estate investors as a reliable investment option. These properties, characterized by their low landlord responsibilities and consistent rental income, have been particularly attractive in low interest rate environments. However, as interest rates rise, the market for NNN retail properties undergoes changes that investors need to understand. This article explores the enduring appeal of NNN retail properties and examines how shifting interest rates impact prices and investor considerations.

What to Look for in an NNN Leased Retail Property: When considering NNN leased retail properties, investors often seek opportunities for a 1031 exchange, aiming to transition from more labor-intensive properties to those that offer stable income. Location plays a crucial role, with high-visibility areas surrounded by complementary retailers being highly desirable. National retailers, especially trendy and popular ones like Chick-fil-A or In-N-Out Burger, generate greater investor interest and command higher prices. Long-term leases with regular rent increases are preferable, and leases with corporate-owned stores are generally considered more stable due to their strong credit stature.

The Current Market for NNN Leased Retail Properties: The rise in interest rates has significantly impacted the NNN lease property market, leading to a decrease in demand. Previously, investors could secure loans for NNN retail properties at rates around 3% to 3.5%. However, the current environment has seen a sharp increase in the cost of debt, with interest rates ranging from 5.75% to 6.25%. This shift has necessitated an increase in cap rates to maintain the same cash-on-cash return. Institutional investors now seek cap rates between 6% and 6.5%, while sellers are still holding onto the notion of achieving cap rates around 5%. This disconnect creates challenges in the market.

Market Outlook and Considerations: While the current market faces challenges, experienced investors anticipate that cap rates will eventually realign with interest rates once they stabilize. Buyers pursuing a 1031 exchange remain active in the NNN investment market, aiming to defer taxes and acquire properties with long-term leases and national tenants. Properties occupied by popular and stable retailers continue to trade briskly. Retailers with lower reputations or franchisee-operated stores may experience higher cap rates due to perceived risks. As interest rates fluctuate, it’s essential for investors to stay informed and adapt their strategies accordingly.

NNN retail properties offer investors a relatively low-risk investment option with stable income streams. While rising interest rates have impacted the market, there are still opportunities to be found, particularly for those seeking a 1031 exchange and long-term lease properties occupied by reputable national retailers. As the market adjusts to interest rate changes, it’s crucial for investors to carefully evaluate each property’s potential and consider the evolving dynamics of the NNN retail property sector.