A creditworthy tenant with a certain degree of correction-resistance in its marketing strategy is a fairly sure bet to hedge against the vagaries of the greater market.
The coronavirus news gets scarier every day as the spread of the disease worsens. Investors have taken notice, and the stock market reflects it. But those of us who have been in the business long enough, know that the long-game is the thing.
We cannot overemphasize the importance of common sense and precautions in this critical situation, but our focus has to remain on the business implications, and experience tells us that this too shall pass.
It’s hard to ignore the scent in the wind. The COVID-19 pandemic has had a serious impact on the real estate industry both directly and indirectly, most obviously, but not solely, on the industrial market. With the spread of the virus exploding in China, the country went into lock-down in order to get the disease under control. That strategy rippled into manufacturing, and the global shipment of goods has been severely curtailed. In addition, with the revelation that the disease had spread to Italy and South Korea, the financial markets began a sell-off in mid-February that resulted in the stock market suffering losses approaching those of the financial crisis of 2008.
But from an investment standpoint, there is hope hidden in the dire news. US Treasury yields hit a historic low on Friday Feb. 28th and then did it again the following Monday, ultimately pushing yields briefly below 1.0%. The perceived impact on these historic yields is lower interest rates, which–if real estate investors are borrowing money to own their real estate–will result in better levered returns.
As always happens in the midst of an economic correction (or ahead of a correction in the case of more prescient–read: “experienced”–investors) players in the market seek higher ground, and turn to more stable and conservative opportunities, preferably with long-term, fixed-income options. At the very least, they’ll diversify into these deal types in an effort to minimize exposure. Simply put, from our perspective, that means seeking out net lease opportunities.
Fold in a creditworthy tenant with a certain degree of correction-resistance in its marketing strategy (Walgreens or CVS, and standalone medical office locations are just three prime examples), and you have locked in a fairly sure bet to hedge against the vagaries of the greater market.
Yes, I said fairly sure. We’re confident concerning the strength of the net lease space. But we’re not cocky, and we know how a serious turn of economic events can make the market go sideways. But we hold to our original premise, a premise that has proven itself time and time again. Wait it out. Play the long game.