Loudoun County NNN Commercial Real Estate Market Update

In this article we will discuss the NNN commercial real estate market in Loudoun County. We will begin with a brief overview of the national picture and then review Loudoun County's single tenant net lease properties, NNN lease property sales in the past 12 months, and finish with a review of NNN lease properties currently available for purchase.

National Market Review for the Previous 12 Months and Future Forecast

Triple Net Lease investments across the US were comparatively safe for investor returns in 2020, When the lessee remains a viable entity, they pay their rent to the investor-owner and are directly responsible for paying property taxes, insurance, maintenance and utility costs. This makes NNN lease properties an effective income stream requiring little, if any, direct owner involvement.

As with every CRE investment, it is essential to choose tenants in a stable line of business who either deliver an essential service or where demand for their products and services will remain relatively strong. That underlying factor must then be matched by choosing a property in the right location for that tenant's long term business growth or where attracting a sub-lessee would be a simple proposition. Loudoun County's recent history checks a lot of the 'location' boxes, as we have covered in previous articles.

A National Cap Rate Review 2020

The COVID-19 pandemic impacted the commercial real estate market both in terms of lease length and cap rates. A recent survey (1: see below) of 2,095 CRE sales in 13 sectors across the US gives us a good overview. The report only captured data where sales price and cap rate were reported. The sectors included automotive, retail, bank, educational/childcare, medical/pharmacy, grocery, general retail, and dining. The basic stats are as follows:

  • Automotive did well and could see an 8% growth in 2021. 2020 saw an average cap rate of 6.3% with the average lease term remaining at 9 years.
  • Banks were obviously impacted by the pandemic, but the average lease term increased by 3 years, and the 4Q cap rate averaged 5.75%.
  • The Education sector saw average lease terms increase to 14 years and an average cap rate of 6.96%.
  • The single tenant Medical sector is also strong, for obvious reasons, with an average cap rate for the previous four quarters standing at 6.85%.
  • Pharmacies are both an essential service and are being seen by many consumers as a convenient alternative to other retail outlets. The 12 month cap rate was 6.17%.
  • Big Box stores' lease terms dropped 2 to an average of 8 years, and the average cap rate was 6.08%.
  • The C-Store and Gas sector is expected to grow 2% annually for the next 5 years. The 12 month average cap rate was 5.26%.
  • Dining needed to adapt quickly in 2020. The three sub sectors surveyed (casual, fast casual, QSR,) saw an average cap rate of 5.87% ranging from 5.39% in Q4 2020 for Fast Casual to a high of 6.67% in Q1 2021 for Casual Dining.
  • The Grocery sector is very much an essential segment. Many of 2020's sales were in California (which has historically lower cap rates, so these numbers are less 'balanced' when looking at the entire country.) The 12 month average was 5.83%.
  • General Retail (home goods, fitness, hardware, etc.) typically delivers stable cash flow and good returns. The average cap rate stood at 6.43%.

What of the Future?

These numbers indicate a CRE market stability that many did not expect. Careful Line of Business and location selection are critical factors in any specific market. To complete this section, it is worth noting that the Commercial Real Estate Development Association's Research Foundation, published a report in May 2021 stating suburban office space should be in higher demand as we move through 2021, 2022, and 2023. Real GDP is expected to grow by 7.7%, inflation to average 2%, and unemployment to hover around 4.5%.

While no one has a crystal ball, the federal government's stimulus policies, Northern Virginia's firm economic base, its increasing population, infrastructure investments, and the massive CRE investments already in place, make this a prime time to look closely at what Loudoun County offers.

Total Single Tenant Net Leased Properties in Loudoun County May 2021

There are currently 555 single tenant leased properties totaling 15.3 million SF and showing an average cap rate of 6.5%. 80% of the properties show a cap rate of between 5% and 7%, No new buildings are under construction, and none has been demolished in the past year.

The average market sale price per SF is reported at $248 (a recent change of just 0.1%.) Market rent per SF is rising and stands at $22.21. This rental increase began in Q3 of 2020 and, year-on-year, shows a 3.4% rise. Asking rent per SF currently stands at a few cents below this figure. 12 month occupancy rate at delivery is 100%, and has been since Q3 2018. Current overall occupancy stands at 99.4%, although daily vacancy rates fell in May 2021 to just below 0.2%.

The amount of vacant square footage is only 97.3K, a number which is falling, and sublet square footage rose to 77.2K suggesting that if a tenant vacates a property, it can be sublet without too much difficulty.

Single Tenant NNN Leased Properties Closed Transactions Q3 2020 - Q2 2021

There were three closed transactions totaling $6.1 million and adding up to 9,000 SF. Q4 2020 and Q2 2021 saw most closed business. $220,000 of the closed business was a condo unit, the other two were individual properties. The sold price per SF averaged out at $397, split 50/50 between the $220 - $250 per SF and $400 - $450 per SF. The difference between contract and asking price was (-5%.)  Sold prices and NOIs delivered an average cap rate of 6.3%. Specifically, one property's cap rate was 4.8%, and the other two, were 7% each.

All buyers and sellers were local private businesses, as opposed to national, foreign, REITs, etc. We are pleased to comment that Serafin Real Estate ranked as the top selling broker in this market segment.

NNN Properties Currently Available for Purchase

There are three triple net properties (six records) currently for sale in Loudoun County, totaling 27.2K SF. They all show a cap rate of 6.1%. Asking prices are between $869, 000 and $2.5 million. Prices per SF range from $285 to $399. All three properties are for sale by private owners.

Final Comment

Loudoun County is an excellent location for CRE investment. The US DOL previously ranked Loudoun (September 2020) #3 in the nation for job growth, and the International Economic Development Council ranked Loudoun #1 in its category for business investment.

Aerospace, aviation, transport, federal government contractors, IT and communications tech, health care, and bio-medical research all have a major presence here, so when we add in that 70% of the world's internet traffic passes through Loudon every day it is no surprise to learn that the county's population is rising. The growth of well-paid residents, in turn, demands provision for high quality education and childcare facilities as well as other tertiary lines of business.

NNN lease properties can be an excellent investment to generate passive income and a stable high return. Choosing the right property to attract the right tenant demands in-depth local experience and a top grade track record. If you would like to learn more about NNN investment opportunities in Loudoun County and to discuss your specific ideas and long term goals, please click this link, leave your details, and we will get right back to you.

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