The coronavirus pandemic and accompanying recession may have stifled a lot of acquisition activity in commercial real estate last year. But that wasn’t the case at Pasadena, Calif.-based JRW Realty Inc. In 2020, the brokerage firm handled 147 transactions totaling more than $681.3 million.
How did JRW Realty manage to not just survive, but thrive in 2020? Because it focuses on an asset type that remains extremely attractive to high-net-worth individuals, family offices and other clients—necessity-oriented net lease properties.
“Our clients know exactly what kinds of properties they want, and they have the cash on their balance sheets to close deals quickly,” says Melinda Marston, president of JRW Realty.
More cash from JRW Realty’s clients will certainly pour into the net lease sector this year. A new report from The Boulder Group, a Wilmette, Ill.-based net lease brokerage firm, indicates that net lease transaction volume fell in 2020 compared with its record-setting peak in 2019, but “investor demand for the net lease sector should remain active throughout 2021, especially for high quality tenants in essential businesses.”
In a Q&A with WMRE, Marston discusses investment challenges her firm faced in 2020, investment opportunities on the horizon in 2021, and the firm’s deal criteria and sourcing approach.
This Q&A was edited for length, style and clarity.
WMRE: Who makes up your client base? Are they mostly family offices? High-net-worth individuals? And how do you secure clients?
Melinda Marston: Our clients consist of a mix of high-net-worth individuals, family offices and institutional investors. We’ve been in a close working relationship with most of these clients since our founding, and they are such active buyers that our main challenge has been keeping up with their acquisition pace more than it has been about finding new clients.
WMRE: What investment challenges did you and JRW Realty face in 2020? How did you overcome them?
Melinda Marston: [The year] 2020 was challenging in a validating way, since we saw demand increase substantially for the very kinds of assets that we focus on, both in the broader market and among our clients. This has made sticking to our acquisition criteria even more important, especially since the increased demand has compressed cap rates for credit tenant net lease properties. We overcame these challenges primarily by continuing to take a relational approach, working hard to provide a swift and seamless experience for the sellers, brokers, developers and tenants we do business with.
WMRE: What investment lessons have you learned in 2020 that you’ll carry into 2021 and beyond?
Melinda Marston: All of the properties that we had sourced for our clients before 2020 performed exactly as we had underwritten, providing our clients with uninterrupted rent collections and cash flow throughout the entire year in the face of unprecedented lockdowns and economic disruption. We were thrilled that our conservative approach and diligence paid off so well for our clients, and this gave them and us the ability to grow at a time when many other real estate investors were contracting.
Looking to 2021, we are not expecting there to be any slowdown on the demand side for our clients, who are collectively looking to use the cash on their balance sheets to close on over $700 million in net lease properties in the coming year. So, in many ways, our operations going forward won’t differ too much from the approach that carried us through this last year, which focuses on adhering to our discipline, valuing both our clients and the people we do business with, and continuing to cultivate long-term relationships with them.
WMRE: What would you say the strongest commercial real estate investment sectors will be in 2021?
Melinda Marston: When we think about strength, that means focusing on real estate investments that are poised to produce stable and reliable performance even in the face of difficult economic circumstances—something that has become very important to investors during this pandemic. Net lease real estate leased to tenants that successfully operate in grocery, pharmacy, health care and other essential industries has been particularly resilient throughout the height of the COVID-19 crisis and the economic tumult experienced in 2020. We expect this strong performance to continue into 2021 and beyond.
No one could have accurately predicted the devastating social and economic events of this past year.
However, given the overall economic landscape going into 2020, it was clear to us and our clients that we needed to take a more defensive and conservative investment approach, which proved to be an effective strategy through the pandemic. We prefer to stick to our discipline and focus on sourcing properties that will reliably serve our clients, regardless of how the economic and political tides may change.
WMRE: Why does your firm focus on net lease properties? What is it about them that makes them attractive as investment opportunities?
Melinda Marston: A couple of our larger institutional buyers had analyzed the performance of commercial real estate through the Great Recession and found that the NOI of net lease real estate was far more stable than any other major asset class during that period of extreme economic tumult. Specifically, net lease properties with investment-grade tenants operating successful businesses in necessity retail and health care survived and even thrived through the worst recession since the Great Depression, while the NOI of all the major asset classes declined precipitously.
The reason why necessity-based and credit-worthy net lease real estate investment exhibits such stability through economic downturns—including the one we’re going through currently as a result of the COVID-19 pandemic—is that its rents are paid by large companies with strong fundamentals, strong balance sheets, and products and services that continue to be needed throughout economic crises. Net leases reduce an investor’s exposure to operating expenses—including taxes, insurance and property maintenance—making for consistent, reliable income. Long leases are also key to an investment property’s stability. Remaining terms of seven to 15 years can create bridges across upcoming economic valleys that may need to be crossed.
WMRE: On your website, you say JRW Realty reviews over 100 properties each week and chooses only 3 percent to 4 percent to present to clients based on “rigorous acquisition criteria.” What are those criteria?
Melinda Marston: Our criteria cover many dimensions of commercial real estate properties. In addition to tenant financials and industry considerations, we focus on factors such as market and demographic information, lease terms, tenant and store operating performance, population and job growth, and housing and crime statistics. Typically, our clients prefer net lease properties with 10 or more years remaining on the lease, in markets with a five-mile population of 40,000 or greater, lower crime rates, highly visible locations with strong traffic counts, and, in general, markets with favorable demographic trends. In our experience, of the 100 or so properties that we review in a given week, only around 3 percent to 4 percent satisfy all of our and our clients’ criteria.
WMRE: How do you go about sourcing deals?
Melinda Marston: The vast majority of assets that we source comes from our network of long-standing relationships with other brokers, developers, tenants and investors throughout the country. We’ve been fortunate enough to see this network grow over the years in part because we take a win-win mindset with the sellers and brokers who do business with us, being committed to providing quick feedback, as well as to fair and equitable pricing and business practices.
By taking the long view and prioritizing healthy and sustained relationships with other industry professionals instead of short-term profits, we get a lot of return business with sellers who know that we mean what we say and are committed to making transactions happen swiftly and efficiently, giving us access to off-market opportunities.