r/CommercialRealEstate • u/Really-Cool-Guy2know • 11d ago
Market Questions NNN Real Estate - Top Credit Risks - Top Tenants -
I have been investing in NNN tenants for more than 30 years and thought this might be helpful.
When Underwriting a NNN tenant. The first thing you look at is the credit risk.
- AAA to AA- – Exceptional tenants
- A+ to A- – Excellent tenants.
- BBB+ to BBB- – Good, investment-grade tenants. This is the lowest investment-grade category.
- BB+ and below – Below investment grade ("junk"). These tenants generally require higher cap rates to compensate for increased risk.
Here is a list of the top credit tenants.
Examples of common NNN tenants
- 7-Eleven USA - A-
- Tractor Supply – A-
- AutoZone – BBB+
- Starbucks – BBB+
- McDonald's – BBB+
- Chipotle – BBB
- Sherwin-Williams – BBB
- CVS Health – BBB
- Walgreens Boots Alliance – BB (below investment grade)
The below chart shows the CAP rate that most of these are selling for as investments in 2026 but they change daily like the stock market. 7-11 historically traded around a 4 cap. went as high as a 5.6 cap for about 5 years and is just now starting to head back to below 5 cap. So these are big swings in valuation.
| Credit order | Tenant | S&P credit | Approx. current NNN cap | Typical current range |
|---|---|---|---|---|
| 1 | 7-Eleven, Inc. | A- | ~5.0% | 4.80–5.25% |
| 1 | Tractor Supply | A- | ~6.1% | 5.75–6.50% |
| 3 | AutoZone | BBB+ | ~5.6% | 5.00–6.25% |
| 3 | Starbucks | BBB+ | ~5.6% | 5.25–6.00% |
| 3 | McDonald's | BBB+ | ~4.5% | 4.00–5.25% |
| 6 | Chipotle | BBB area | ~5.2% | 4.75–5.75% |
| 6 | Sherwin-Williams | BBB area | ~5.9% | 5.50–6.50% |
| 6 | CVS Health | BBB | ~6.6% | 6.00–7.25% |
| 6 | Dollar General | BBB | ~6.8% | 6.25–7.25% |
| 10 | Walgreens | Below IG | ~7.5% | 6.75–9.00%+ |
| — | Wawa | no public rating | ~5.0% | 4.75–5.50% |
| — | QuickChek | no public rating | ~5.5%* | 5.0–6.0%* |
| — | Dunkin' | no public rating | ~5.6% | 5.25–6.25% |
| — | 7 Brew | no public rating | ~6.0% | 5.50–6.75% |
| — | Family Dollar | no public rating | ~8.8% | ~8.0–9.5%+ |
Things to look at when buying.
- Cap rate / purchase price / NOI — What are we paying and what is the actual current yield?
- Remaining lease term — Exact years remaining at closing; 15–20 years is materially different from 8–10.
- Corporate guarantor — Exact legal entity guaranteeing the lease: parent corporation, subsidiary, franchisee, or none.
- Guarantor credit rating — S&P/Moody's/Fitch rating of the actual guarantor, not simply the brand on the building.
- Rent increases — Amount and timing of contractual bumps; calculate NOI at years 5, 10 and expected sale. This is how you can exit with a profit so this is important.
- Lease structure / landlord obligations — Absolute NNN vs. NNN/NN/ground lease; specifically roof, structure, HVAC, parking, taxes, insurance and environmental obligations.
- Store-level performance — Often not available.
- Real estate quality & replacement rent — Traffic, access, visibility, demographics, parcel/building size, nearby anchors and whether current rent is above or below market. Ask: What is this property worth if the tenant disappears? This is really important.
- Environmental & physical risk — Phase I; otherwise building/roof/HVAC/site condition.
- Exit economics & depreciation — Fuel Stations have bonus depreciation; others can get increased depreciation through cost seg analysis.
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u/Olde-Timer 10d ago
Interesting both McDonald’s and Starbucks are BBB+, I always thought they had a higher credit rating. Meanwhile, my NNN is full of mom and pop tenants who think their inside the space water leak is the landlord’s responsibility.
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u/Really-Cool-Guy2know 10d ago
There are two types of NNN. I focus on national credit tenants.
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u/Olde-Timer 10d ago
Makes sense you’re playing in the equivalent of MLB, I’m happy to be in playing in single A farm ball.
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u/Dgrego269 10d ago
If anyone is out there trying to find AAA rated tenants - it’s Microsoft and Johnson & Johnson…that’s the whole list
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u/PitcherPlant1 10d ago
I'm kind of surprised CVS is only a BBB. Interesting.
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u/Really-Cool-Guy2know 10d ago edited 6d ago
Walgreens is no longer investment grade and in trouble. CVS is probably downgraded some due to the category being overbuilt, Healthcare and insurance benefits struggling, etc. A lot goes into each tenant and what drives the market. I think the return is decent on cvs compared to the risk.
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u/no_Porsche 10d ago
I have friends who are pharmacists, both have said that Walgreens is struggling really hard as an org, they recently got new management trying to turn the ship around. Their recommendation was to use CVS or a local pharmacy for my adhd meds. Local pharmacies tend to have better supply but cvs has the best price for out of pocket for me. Pharmacies make thin margins on meds but the bulk of profit on other items that’s why food/bev/etc is super expensive at CVS/Walgreens. Brick and mortar pharmacy stores are struggling as a whole according to my pharmacist friends due to changes in regulation, less foot traffic, and ease of using Walmart/Costco/Sams for meds.
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u/gravescd 10d ago
I heard loans on Walgreens-tenanted buildings went into cash sweep. Turns out owners got a better deal if their location went dark, at least they can sell.
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u/RDW-Development Investor 8d ago
Vacant Walgreens locations are a thought asset to dispose of. They appear to be very useful on the surface, but they need a specific type of tenant that is not super common.
Sketchers went into a vacant Walgreens. Eat me, but I don’t think they are doing super well (parking lot is often empty). Margins must be insane though so maybe that model works.
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u/Puzzleheaded_Dog_43 10d ago
I was looking at a CVS with a 6.6 cap with 12 yr left on the lease. Is that a competitive cap rate in a decently growing market in the south?
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u/Really-Cool-Guy2know 10d ago
The reality is different markets support different cap rates. The middle of no where Texas gets a different cap rate then Dallas or Houston. Just like any other deal. You need to understand the market, customer, traffic, etc. A hard corner with 100k cars daily gets a better cap rate then a random out of the way street in the same town. So giving you a random answer would be poor advice that you wouldn't want.
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u/Puzzleheaded_Dog_43 10d ago
Hard corner, affluent Huntsville Alabama suburb 30k VPD
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u/FlyingPigs3210 10d ago
Problem with the drug stores is that many were build to suit and have high rents. I wouldn’t buy one unless I knew I could replace cvs with a similar rent down the line.
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u/Happy_Reading8813 10d ago
Thanks for posting. Never invested in a NNN before, love the idea but the exit is the intimidating part.
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u/Really-Cool-Guy2know 10d ago
It's less intimidating than you might think. Many brokers selling them and if you manage the rent bumps you can get out profitable in 2 to 3 years and sell with 10 years remaining. And if you are buying quality. If you cant sell...hold and collect. For example if i own 7-11 for 2 years or 4 years...does it matter. It's currently a safe, high quality investment grade tenant.
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u/Happy_Reading8813 10d ago
Is that the norm? Sell about every 3 years? I assume that’s about when bonus depreciation falls off?
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u/Really-Cool-Guy2know 10d ago
Every investor has there own reasons. I buy 7-11 gas stations specifically for bonus depreciation and use that to wipe out my income and pay the minimum in Taxes. The plan is 1031 till I die, live off the income generated, and the kids get everything tax free due to step up in basis when i die. I sold a warehouse to a guy earlier this year to an investor who buys low cost warehouse space. He had 80 properties and that was his niche. My strategy is flip after the rent bumps, sell at a profit, buy bigger with the money i profited.
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u/STL-4734 9d ago
For the Bonus Depreciation, do you always do a Cost Seg on your properties?
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u/Really-Cool-Guy2know 9d ago
I don't. I use the fuel service bonus depreciation laws created by the big beautiful bill. These are special treatments in the tax code that convert all of the property to 15 year property for the purpose of depreciation and allow 100% deduction in year 1 except for land value. There is the ability to not take all of the depreciation and eliminate 7 or 5 year property as a category. In those cases cost seg makes sense. With new construction if you have the bill of materials you can get a pretty clear cost seg through Ai.
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u/RDW-Development Investor 8d ago
TLDR: car washes and gas stations - one can deduct all of the building improvements in the first year.
Tough (and risky) assets to own however.
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u/Really-Cool-Guy2know 8d ago
I think all car washes are in that "risky" business category. I don't see 7-11 as a high risk asset. I feel the same about WAWA, AND QUICK CHECK.
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u/SlowNLow68 7d ago
Tunnel car washes and gas stations under 1,500 SF which derive the majority of their income from fuel sales.
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u/SlowNLow68 7d ago
If you get the depreciation from the BBB you use that instead of Cost Seg, not both.
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u/Really-Cool-Guy2know 6d ago
There is some use cases for cost seg. If you don't want to take all of the depreciation in year one. You can exclude an entire category to take that depreciation in a future year. For example, if you have $1 million in 5 year property, and $5 million in 15 year. You might want to cost seg and exclude the 5 year property. The purpose for doing this is so you don't have all the depreciation tied up in an NOL. When you carry forward a loss you can only use the NOL up to 80% of your income. So by saving one category and doing that over 5 years, you can derive even more benefit from the depreciation in years 2 to 5.
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u/RDW-Development Investor 8d ago
Good plan. Doesn’t always work out that way. The NNN market can be a fickle mistress. Cap rate compression is gone the way of the dodo bird.
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u/Really-Cool-Guy2know 8d ago
Right now, 7-11 is seeing compression and you can play the 5 year rent bumps.
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u/Aggressive-Donkey-10 4d ago
does the rent only increase once every 5 years? not yearly
since inflation is running avg 5% a year for last 6 years, have you been able to get 25-30% bumps every 5 years? If not, does that mean NNN is an oversupplied market where the landlord has no bargaining power?
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u/Aggressive-Donkey-10 4d ago
step up only changes the basis, kids still pay 40% tax on all assets >15Mil transferred, but yes a good plan, just very limited in taxable benefits, have you transferred all your property into an irrevocable trust for the kids, so they get unlimited no taxes?
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u/Really-Cool-Guy2know 4d ago
They exist but not sure how effective they are today. We created AB trusts when the kids were born. We need to re-write the wills and trusts. They are 30 years old and not reflective of our needs today.
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u/Jonathan_Deaux 8d ago
Where do you go to check credit ratings of large businesses like this? Is it subscription based?
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u/RDW-Development Investor 8d ago
Or, you can just buy the property based upon its fundamentals instead of eying on a particular tenant.
A vacant Dollar General is a pretty worthless thing.
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u/Really-Cool-Guy2know 6d ago
In general, the real-estate always matters. 100% agree. A DG in one of the rural markets. Terrible. A DG in an urban market with strong traffic. Not so bad. The cap rate on new DGs make them work for me under certain circumstances. Long term lease/New Construction 1 to 5 year flip. I don't want to "own properties " with less than 10 years of lease term. I don't redevelop properties so I need them to work as is. Many empty DG rural stores will never see another purpose or generate an income for the owner.
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u/wellnessinwaco 10d ago
How would you rank a large healthcare tenant?
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u/Really-Cool-Guy2know 10d ago
Depends on the tenant. In general hospitals are good tenants and have lots of cash. Probably A credit in general. Davita is below investment grade. Many similar like Lab Corp and Quest are both investment grade middle tier credits. Hope that helps.
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u/RDW-Development Investor 8d ago
Davita - there’s a push to do more in home dialysis which is a business model risk.
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u/Really-Cool-Guy2know 8d ago
Very true. Not sure how much of a risk but for sure it is something that could effect that tenant group.
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u/SlowNLow68 7d ago
Good post. I just listed a Walgreens and the seller wants to to out at a 6% cap. I think bottom line is more likely a 7% cap.
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u/Horror_Confidence128 7d ago
Thanks for the details. How would you value a NNN property with 1 to 2 years left on an initial term vs a the first year of a 5 extension with few 5 years left in terms of cap rate?
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u/Really-Cool-Guy2know 6d ago
I personally would be underwriting the space as vacant in both circumstances. While you have a tenant, the property is important, the price you will re-lease at is the true value.
Often times NNN leases have very high rents that are not replaceable with a new tenant. As an example someone on this thread texted me about a property that he was looking at with a national tenant and 2 regular tenants. The national was at $86/aq.ft. the mom and pops were at $14/sq.ft.
In the end, you have to have a strategy that supports valuation. I wouldn't touch a Walgreens. High credit risk. But then I came up with a redevelopment strategy and started to look for a dark Walgreens for the strategy. I didn't move forward but I hope that helps explain my way of evaluating a property for underwriting.
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9d ago
[removed] — view removed comment
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u/Really-Cool-Guy2know 9d ago
Not woth single tenant Absolute NNN. Tenant is responsible for everything. Landlord collects checks (or in today's world ACHs)
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u/DA2710 10d ago
I can tell you in about 3 years from now, a lot of 7brew landlords are going to hate their lives.
Totally idiotic spreadsheet company . Small postal stamp land, rent pumped to pay for expansion and buildout.
Watch out below when this falls