The Net Lease Case for the Convenience Store

Andrew Fallon is executive managing director, National Net Lease Group & Market Leader at SRS Real Estate Partners.

The convenience store / gas station sector has emerged as one of the more attractive, essential retail investment options within the net lease space. This is due to expansion of in-store offerings and because the convenience store business model exemplifies internet resistance.

These operators are uniquely situated, combining multiple essential, quick-service business lines within a one-stop shop location. If you think about what customers are buying at these stores, the argument could be made that owning a modern convenience store is comparable to owning a coffee shop, a quick-service restaurant, a grocer, and a gas station, all under one roof. This evolution is not a new phenomenon, but in these times of uncertainty convenience stores are proving their resiliency and adaptability as circumstances dictate, and as consumer preferences and trends evolve.

Consider the growing consumer demand for quality, quick, grab-and-go meals. Royal Farms is a mid-Atlantic convenience store chain with a following for its crispy fried chicken, flaky dinner rolls and breaded potato wedges known as “western fries.” In 2019, Food & Wine named it “the best fast-food fried chicken a la gas station.” During COVID, many consider drive-thrus to be even better than grab-and-go meals. Sheetz, a mid-Atlantic convenience store operator with 600 stores, offers drive-thru lanes at a number of their locations where customers can order from their made-to-order menu without even getting out of the car.

In another example of adaptability, Wawa, an East Coast operator of more than 900 convenience retail stores with more than 600 offering gasoline, is partnering with Tesla in its Supercharger network expansion. The convenience store and fuel-station chain has been one of Tesla’s biggest partners in the US. Since it takes 30 to 60 minutes to charge an electric vehicle, the customer is likely to go inside while they wait to get a bite to eat, a gourmet coffee, or even a meal for their entire family. Tesla is now installing Superchargers at many convenience store brands including Royal Farms and Sheetz locations.

This modern convenience store business model is changing investor perception because they are huge profit centers with multiple concepts that are now evolving into destinations for their specialty items, and proving their ability to get the consumer to spend more time and money on location. Accordingly, the facilities are larger, cleaner, more attractive and costlier to build, which requires a big investment by the tenant.

When an investor is looking for a class-A property with an investment-grade tenant that also operates in an industry that’s COVID and e-commerce resistant, the pool of available properties and tenancies becomes small, really quick. However, private and institutional investors alike have demonstrated interest in this product type as the convenience store business model is proven, the credit profiles are strong, and the underlying real estate is usually well-located with significant site work and building improvements. All of these attributes coupled with their adaptability and a passive net lease structure, make convenience stores one of the most highly sought-after net lease investment options. Moreover, the resiliency and adaptability of operators such as 7-Eleven, RaceTrac, Sheetz, and Wawa should continue to position them well going forward.

While internet-resistance may be a dominant trait in this current cycle, the modern convenience store operators are leveraging convenience, fast food, and technology as the sector continues to adapt to new trends and changing consumer preferences.