Consumer Spending Boosts Single-Tenant Net Lease Sector

When U.S. consumers open their wallets and purses this summer, it’s to shell out money on dining and necessity retail. These spending priorities are boosting the single-tenant net lease (STNL) sector, which is comprised of restaurants and retailers who occupy freestanding buildings with no other tenants.

Consumer spending has otherwise been stagnant, as shoppers are focused on the social aspects of dining out after years of being limited due to the pandemic. This is proven by a recent Marcus & Millichap report that shows restaurant and bar spending up 13% annually. The other consumer priority is essential goods, which includes discount retailers like Dollar stores and Five Below. Discount retailer foot traffic is up more than 2% in Q1 2023 compared to the same timeframe in 2022.

Despite record-low unemployment numbers and cooling inflation, consumers are being cautious about spending sprees, choosing to splurge selectively on dining out and groceries. These consumer spending metrics are making the STNL sector an even more ideal investment, even though investors are grappling with more stringent underwriting.

Vacancy among STNL assets is already historically low, and the sector was on a 10-quarter stretch of positive leasing activity as of early April. When the vacancy level is this low it usually results in an uptick in construction, but that’s not promised with our current economic picture, when materials, labor and capital are all experiencing higher costs.

The STNL sector has always been favored by investors because it offers minimal landlord responsibilities, and tenants are usually well-established national brands. The increased demand as a result of consumer spending only makes the sector more appealing – and competitive. Although transaction activity has been muted this year due to tightening Federal Reserve policies, leasing activity in the STNL sector is soaring, making a good investment even better for investors who have STNL assets in their portfolios.

Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.