Convenience in the Time of COVID-19: Why C-Stores Remain Attractive to Net Lease Investors

1031 Exchange ImgConvenience stores and gas stations have been deemed essential retailers during the COVID-19 crisis, causing an increase in investor demand for this asset class

Convenience stores were popular investments pre-COVID-19 due to their premium real estate characteristics, such as high traffic locations and hard corners, not to mention the potential tax benefits for the land and building deals. Since COVID-19 hit, c-store interest and activity has picked up even more due to the essential nature of these businesses and the fact that they’ve remained open during the pandemic.

New development of c-stores has remained fairly robust, despite COVID-19’s impact, and many tenants in the sector are expanding

Of the national and global brands, 7-Eleven is the brand most actively expanding. In recent months, they unveiled a new store concept and announced plans to double their U.S. locations by 2027. They’ve delivered quite a few stores already this year, and more than 60 of their newly built locations are currently available for sale. QuikTrip and WaWa have both announced new locations this year, as have Sheetz and Kum & Go, and some of the smaller brands are expanding too. Especially in today’s market where we seem to be flooded by news of store closings and bankruptcies, the c-store sector provides some positive trends. Continued expansion by these retailers gives real estate investors great opportunities to acquire newly developed assets with long-term leases.

Times are changing and today’s c-store sector doesn’t look like it did a few years ago

One trend we’ve witnessed in the last decade is a change in deal size. Ten years ago, transaction size for c-stores was closer to the $2.0 to $4.0 million range. Today, most of the transactions we are working are in the $5.0 to $8.0 million range. This trend has largely been driven by the increased sophistication of the assets – as c-stores diversify their product and service offerings to try to compete with traditional restaurants, coffee shops, dollar stores, and even grocery stores, we’ve seen properties grow larger with higher-end build-outs to accommodate and attract more customers. The increased deal size has priced some investors out of the market, but it’s also brought new investors to the table.

Looking ahead, the convenience store sector should remain a bright spot for investors

This sector will continue to be one of the most sought after in the net lease space for a few reasons. First, the solid real estate locations are incredibly attractive to investors. Secondly, the sector is full of strong credit operators like 7-Eleven, Wawa and QuikTrip, among others. The long-term passive lease structures these properties offer and the potential tax benefits through accelerated depreciation are two more reasons investors love this asset class. And finally, the fact that these tenants are deemed essential retailers is critical. Consumers have an on-going need for gasoline, food, water, and other necessities – if the pandemic continues, and social distancing becomes more challenging in traditional grocery store environments, shoppers may look to stores with lower foot-traffic for their essentials, and c-stores will benefit.

 

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