NNN investments are becoming increasingly popular with passive investors and active investors. But what is drawing so many commercial real estate investors to triple net lease investments?
In general, a triple net lease property offers a low-maintenance investment that generates steady, reliable earnings (without the extensive landlord duties that come along with other types of investment properties, such as residential real estate). While there are hundreds of different types of businesses that want nnn lease properties, there is a common thread that connects the best nnn tenants for long-term investments.
Who are the Best NNN Tenants?
It’s impossible to make a broad statement about who will be the best nnn tenant for every type of property. However, we believe the best triple net (NNN) tenants are tenants with recession-resistant businesses. This is because recession-resistant businesses operate straightforward service and product businesses that are needed in good economic times and bad. As a result, recession-resistant businesses generally produce a steady income regardless of the economy, which makes them great NNN tenants because they are likely to pay their base rent and bills on time, year after year.
In this article, we will explore the recession-resistant businesses that are good to place in triple net properties. In no particular order:
1. Child Care
Childcare and daycare services are always in demand by working parents. Whether the economy is tanking or thriving, working parents need a way to focus on their careers to continue paying their personal bills. As a result, this type of business typically thrives regardless of what the economy is doing. The U.S. child care market size was valued at USD 33.5 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 4.15 % from 2022 to 2030. The need for childcare makes the business a great one to consider for a nnn property.
2. Tax Preparation
You’ve likely heard the phrase that there are only two certain things in life: death and taxes. While this may not be the most positive outlook on life, it does provide a great opportunity to fill office buildings or shopping center space with a tax preparation company. Regardless of the economy, residents in the area will be required by law to pay their taxes, and many people do not like dealing with the headache of filing themselves therefore gladly pay a professional to do it for them.
3. Accounting, Bookkeeping, Financial Planning, Financial Investing
Similar to tax preparation, there is always a need for financial services. Businesses of all sizes often need support with accounting, bookkeeping, and financial planning. Additionally, individual households often seek financial planning and financial investing services to help manage and build their wealth. These things are top-of-mind for a lot of businesses and individuals regardless of what the economy is doing. In fact, when the economy takes a downturn, individuals may be more likely to pay for financial planning or financial investing services from professionals to help them avoid a significant drop in their own wealth.
4. Auto Repair Shops
People need vehicles to commute to and from work, run errands, take kids to school, and a variety of other regular (and needed) activities. If someone’s car breaks down, repairing it is often not a “nice to have” but a “need to have” situation. As a result, auto repair shops can make great nnn tenants because they’re constantly in need by the surrounding population. These types of shops can be general auto mechanics, or they can be shops that specialize in necessary automotive products or services such as windshields or tires.
5. Grocery Stores
People need to eat. The most affordable way to eat is to purchase ingredients or meals at a grocery store. Since eating out can become expensive, folks tend to reduce the amount they dine out during a recession and double down on going to grocery stores to get their food and make meals at home. Grocery stores’ necessary service, combined with the fact that grocery stores like to sign long-term leases to establish their territory and become a staple in a neighborhood’s regular errand routes, make them a great option for a nnn lease.
6. Convenience Stores
Similar to grocery stores, convenience stores are usually used to small, last-minute items that folks need while running errands. They tend to generate consistent income and can become a staple in the community if run well. Such properties can be stand-alone or attached to a gas station.
7. Liquor Stores
Similar to grocery stores, many adults in the U.S. like to drink alcohol, and there’s not a drastic amount of difference in alcohol consumption during a recession compared to a booming economy. What does shift is people tend to reduce the amount they spend going out to bars in favor of saving money by purchasing their wine, beer, and liquor from stores. This trend helps make liquor stores a reliable triple net tenant.
8. Courier and Delivery Services
Even during slow economic times, people and businesses need to send products, paperwork, gifts, and more from one location to another. Therefore, the necessity for mail services will always exist, making courier and delivery services resistant to economic downturns. Additionally, as buying and selling items online becomes more commonplace, the demand for delivery is anticipated to increase substantially.
9. Health Care Services
In general, healthcare services are not affected by recessions because most people have a strong desire to live long, healthy lives and will generally prioritize whatever costs they need to in order to recover from an accident or illness. This makes businesses such as hospitals, ERs, doctors’ offices, and physical therapy offices great tenants for commercial properties.
10. Senior Services
As an increasing number of the Baby Boomer generation are aging and retiring, demand for senior services is at an all-time high in the United States. Seniors require assistance with day-to-day activities, and a recession does not change that. This means that senior services such as caregiving, senior products such as walkers or canes, or senior-specific health treatments are all businesses that could make a great tenant. Additionally, if you like multifamily investments, senior living facilities are also in high demand and will continue to be in high demand for the foreseeable future.
11. Janitorial Services
While residential cleaning services may decline during a recession since it’s not essential, janitorial services for businesses and commercial properties are legally required in many instances and therefore tend to be somewhat recession-resistant. Therefore, cleaning businesses that staff and provide these services generally make reliable tenants.
12. Pet Care Industry
For the first time ever, the pet sector in the United States saw sales of over $100 billion in 2020. Additionally, 52% of pet owners say they spend more money on their animals than on themselves. With this, the pet care industry has been thriving during good economic times, and even in difficult economic times, necessary pet products and services such as food, grooming services, and veterinary visits are still needed. Here’s a slightly more detailed overview of different types of pet care businesses you could consider renting to where a triple net lease works well:
13. Veterinarian Services
Recessions rarely impact veterinary services because they’re a needed service folks are willing to pay for. Because of this, they’re typically a low risk tenant.
14. Grooming Services
According to market research firm Mintel, 40% of Americans between the ages of 30 and 49 have a strong interest in pet care, including grooming services. While this pet care service may be more likely to be cut from an person’s budget during an economic recession, once you get in the habit of having your pet groomed it’s hard to break. As a result, grooming services may be able to thrive year after year depending on the market you’re located in.
15. Essential Pet Supplies
People who own pets typically love them as if they’re part of the family. Pet food, medicine, and toys are unlikely to be cut from budgets and therefore help make pet supplies stores a good idea for a tenant.
16. Property Management Company
There are a lot of commercial real estate owners and operators out there who don’t want to self-manage their properties. However, they do want to collect rent every month so they can leverage or live off of the monthly cashflow, and businesses always need a place to operate. This makes property management companies consistent cash-generators that are more likely to cover their rent long term if they’re running a good operation.
17. Self-Care and Beauty
This may be unexpected, but the self-care and beauty industry has shown itself to be able to weather a recession. Businesses within this industry can vary, but as you’ll see, many are considered “staples” amongst their customers and therefore have become reliable tenants in good economic times and bad.
18. Nail Salons
Manicures and pedicures are inexpensive luxuries that tend to remain popular, even during times of financial hardship.
19. Hair Salons / Barber Shops
Most people like to cut their hair, and many people don’t like to cut it themselves (after all, it’s rather hard to do yourself). Because of this, a well-run hair salon or barber shop can often pay their monthly rent and make great tenants in strip malls and shopping malls.
20. Fast Food Restaurants
While households may cut their dining budgets during a recession, fast food remains affordable and typically isn’t impacted as much. If a family wants to eat out for dinner when they’re struggling financially, they may opt to go to a fast food or fast casual restaurant rather than a more expensive mid-tier restaurant. This sector can include the standard fast food chains as well as local pizza shops, sandwich shops, burger joints, etc. Lower-priced restaurants that focus on take-out or delivery can also be included in this category.
21. Dollar Stores
Just like in multifamily rental prices, folks can always decrease their monthly spending, but it’s harder to increase their monthly spending in an economic recession. Because of this, dollar stores like Dollar General can maintain a consistent customer base year after year which can make them one of the best nnn tenants.
Like doctors’ offices and hospitals, if people get sick during an economic downturn, they will prioritize feeling better, and that often comes in the form of medicine. Pharmacies are often times consistent tenants who will do well in a populated area.
23. Home Repair
This industry falls into a few different categories, the first is DIY and the second is service providers or contractors. When there is an economic downturn, people are more likely to try to save costs by fixing things around their house themselves. This means that hardware stores such as Home Depot or Lowes can be fairly resistant to the economic environment and consistently pay rent through their lease term. Additionally, there may be problems that folks don’t feel comfortable fixing themselves and therefore call in professionals. This typically fall into a few different types of businesses such as HVAC, electrical, and plumbing.
24. Home Moving Services
Sometimes people move simply because they want to, but more often than not people move because they need to. It could be because of a new job, a divorce, a marriage, or having additional kids and needing more space. There will always be scenarios that require people to move, and this means a moving service will continue to have consistent business.
25. Safety and Security Businesses
Many people believe that economic downturns can cause an increase in criminal activity and therefore cause businesses and families alike to install greater security measures. Companies that sell safety and security products or services typically see consistent sales that remain stable year after year and can make for a great nnn tenant.
26. Insurance Agencies
People look for security in uncertain times, both physically and financially. For most people, securing the future is of utmost importance, so people tend to want affordable insurance premiums that provide ample coverage regardless of what is happening in the world. Because of this, insurance companies tend to weather economic downturns quite well and are almost always in demand.
27. Funeral Services
The industry that cares for the deceased will forever be in demand. Businesses that provide funeral services and related products often make for good triple net tenants as a result.
28. Funeral Homes
Funeral homes are often overlooked as businesses and tenants, but they’re always in need and therefore can make great nnn tenants.
29. Coffin Sales
Similar to funeral homes, companies that sell coffins are also always in need. They may not be the most attractive businesses to many, but the products are in demand year after year, and that’s unlikely to change.
30. Water, Sewer, and Trash Disposal
Waste disposal, stormwater or greywater treatment, and sewer management are essential regardless of what the economy is doing. If you can acquire industrial parks or a commercial property that can sufficiently house this type of business, they’ll likely manage to cover their operating expenses for a long time and make reliable nnn tenants.
Triple Net Lease vs. Single Net Lease and Double Net Lease
Triple net leases are just one type of lease where the tenant effectively covers maintenance costs, repair costs, property expenses, real estate taxes, property insurance, rent, utilities, and additional expenses. Through a Common Area Maintenance (CAM) fee, the tenant is often also expected to cover general use costs such as like snow removal for the sidewalks and parking lot. Because of this, many investors like NNN investing because it’s a great way to build a pretty passive investment portfolio.
However, Single Net (N) leases and Double Net Leases are also other types of leases. In a Single Net Lease (N), the tenant pays property taxes. In a Double Net Lease (NN), the tenant pays property taxes and property insurance. As you can tell, Triple Net Leases put a lot more of the costs onto the tenant which helps investors generate consistent cash flow on a monthly basis.
Are NNN Properties Good Investments?
Investors searching for a safe, low-touch investment with reliable returns over a lengthy period of time can consider NNN properties. Due to their consistent cash flow and relatively hands-off structure, a triple net lease property can be a solid investment. However, keep in mind that the lease and tenant are just two parts of a successful investment. You also need to ensure the property is in a good location and conduct your due diligence, and all of the other fundamentals of good commercial real estate investing to set yourself up with a great investment. While NNN properties are often simple to operate and offer good income and equity potential throughout the course of a lease (or however long an investor wants to use the property for equity building, which is usually two years in most cases), they are never guaranteed to be successful so invest wisely.
Best NNN Tenants Summary
As with all components of real estate investing, finding the best nnn tenants for a property is highly dependent on the local market, location, type of property, and more. Always seek expert advice for your particular situation before making any decisions. Additionally, just because a business is a recession-resistant business does not guarantee they will be great tenants because all business owners operate differently. Always vet your tenants thoroughly regardless of what business they operate.
As the property owner of commercial real estate investments or a passive investor selecting which deal to invest in, considering who will rent the building and what type of lease will be used are two keys to your return on investment in addition to other core factors like the cap rate of the property. If a recession-resistant business signs the lease agreement, it will help improve the likelihood that the property generates steady cash flow during the duration of the commercial lease.