In real estate… what is that saying? Location, location, location!
Whether residential or commercial the same rings true. Desirability of a location comes down to positive attributes that the tenant or property owner is looking for.
Generally unless you live in a rural area and understand the nuances of that area to a high degree of knowledge, most buyers stay out of these locations for investment purposes.
Rural locations to weak (small) suburban areas often carry the most risk to an investment because they are often in what we like to call one economy towns. This means a major employer is employing a big percentage of people in the town and if they go out of business the other smaller businesses tend to close down as well. This creates a ripple effect where it is hard to find work and the population starts migrating away to growing areas where there is more opportunity for their families to thrive and be successful.
Rural to weak suburban areas tend to be the FIRST to go down in an economic free-fall and the LAST to bounce back in an economic recovery.
Also lenders tend to shy away from these types of weak locations because risk is higher, so only local banks want to lend on those properties with not so great interest rates, loan terms, etc.
Conversely Urban Core to Strong Suburban areas in a downturn tend to hold values better and recover more quickly. These areas often have many major employers propping up the economy so if one goes out there are many others keeping the economy going and thriving. The development authority for the state, county, city can then work to fill the employer (company) that left the market with another high quality employer.
Right now there has been a big movement happening with retirees moving away from cold belt states to warm belt states. So what
is happening in cold belt states is lots of areas are contracting for investment and business growth. Those areas are often overbuilt so when a building space goes dark it could take years to lease up with a new tenant if at all. The eventual tenant could be local versus a strong regional or national tenant that usually pays more in rent to lease the space.
So in cold belt states we often mention investors need to be very careful where they buy. There are more limited pockets of population growth with high income to invest in versus overall more outward larger growth occurring in warm belt states.
National and regional tenants want to follow the people and the money. They often target their expansion plans to markets with strong growth for income and population levels where they can achieve high sales per foot for their business model and great profitability.
So where is everyone buying currently for NNN assets? We are seeing a lot of activity to the following warm belt states. GA, FL, TX where a big portion (about 70%) of net migration is moving away from cold belt states. The other states with high interest are AZ, NV, NC, SC, TN. Some states might offer additional tax benefits being (no income tax states, like TN and FL). It’s important to check with your tax professional to discover the possible advantages for your particular investment situation.
Of course there are other desirable states in both warm and cold belt states. Often we have a conversation about where a buyer would like to ideally own a property and look in those areas first.
It’s important to know that population only is not a defining factor in investing for a location. Some areas can have high concentrations of people but very poor income levels and high crime. So there
is not security in higher numbers alone that make for a potential good investment.
5-50-55 Guideline
Typically a guideline most lenders like to see is 50,000 people in a 5 mile radius and an annual median income close to the national average of $55,000.
Even in a good quality area all locations are not treated the same. • The access to the property
• The sight lines to a property
• The daily traffic counts
• The going-home side vs. the going-to-work side of the street
• Close access to the interstate
• Daily feeder traffic to the site with junior and large surrounding anchors (Starbucks, Wal-Mart)
• The parcel shape and layout with road frontage
All these metrics and more come into play when looking at a NNN STNL or MTNL property.
Example:
Access — The property could have an easy turn in or very difficult path of entry where you have to go down far and turn around a median with no red light to access the property. Also, you could have a property once you turn in has no additional access to other properties with a road cut through and instead have to go back out onto a busy highway to get to another property.
Sight lines — You could have a property where the tenant is down in a hole with limited visibility or up very high. Generally a property flat to the road or with a very slight elevation is best for sight lines and helping a consumer to easily see and find a property.
Traffic counts — The rule of thumb is most tenants want to see about 15k cars a day (minimum) go by their site. Anything below 15k cars a day and the number of tenants that want to go on your property can decrease significantly. On most non-interstate roads the highest you will see is 50 to 60k cars a day although 25k cars a day is generally seen as a healthy metric.
Going-home vs. going-to-work side of the street —You can have
a type of tenant that is on the wrong side of the street for their business model. Example a tenant that is open for breakfast, lunch, and dinner but 70% of the business is breakfast and they are located on the going home side of the street instead of the going to work side. Additionally you can have 40k cars a day but with a median in the middle and find out the property you want to buy that side only gets 10k cars a day and the other side across the median gets 30k cars a day.
Tip — Check with state Department of Transportation to make sure there is no road widening happening that ongoing construction would affect the viability of your tenant to make money and consumers to have easy access to the business.
In addition check that the DOT would not be using eminent domain to take part of the parking lot to widen the road thereby affecting the parking ratio for your tenant’s business. Generally if non-interstate roads are widened already with
4 to 6 lanes and have high traffic counts then they do not widen any further. If road count is increasing year over year to 20k, 25k, or 30k cars a day, and it is still a 2-lane road, the chances of widening are high due to congestion issues and proper traffic flows.
Closeness to Interstate access — A key component to location is being near the interstate. You not only get local consumers but also travelers to your tenant’s business. Many main commercial corridors will want to build around the interstate exit ramps.
Daily feeder traffic to the site with junior and large surrounding anchors — Having small anchors close by (Starbucks, Chick-Fil-A, McDonald’s) & large anchors (Wal-mart, Costco, Target, Lowe’s, Sam’s Club, etc.) can help daily traffic to your tenant’s business by being in proximity to these more well known high quality tenants. It can be a plus to have a cross easement road where they can go from one of these name brand tenants and drive right next door to your tenant’s place of business. Consumers want ease of access and one-stop type shopping to save time.
The parcel shape and layout with road frontage — For optimal design most tenants prefer a square shaped or rectangle land parcel with a good amount of road frontage. Long and narrow lots or triangle shaped pieces of land often pose severe challenges to good site layout design. National tenants often pass on locating a business on these sites unless it is the only spot available in a highly desirable area. In that case the tenants will usually do everything they can to get creative with their architects to make a site work. So it is critical when looking at a piece of property to determine is this a site the tenant wants to be at long term or was it just to open up business in that area to get market share? You do not want the tenant trying to relocate away from your location in the future because it was not an optimal location.
Now that you have defined location parameters let’s discuss how lenders view NNN properties for the best rates and terms.