Net Lease Retail Remains Hot
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Net lease retail is known as one of the hottest sectors of the commercial real estate industry, and Stan Johnson Co. is right in the middle of it. The firm, which is at booth 1513 at the ICSC Western Division Conference in San Diego Sept. 19-21, averages about $1.5 billion in net lease transactions a year, many of them retail. Ed Breslin, associate director of investment sales in the firm’s Santa Monica office, spoke to GlobeSt.com about trends he is seeing in the industry.
GlobeSt.com: Is there any sign that the net lease market is slowing down in retail, or is it still going strong?
Edward Breslin: I don’t see it really slowing down. I see there being a continued strongdemand for net lease assets across the board. It’s continuing to drive up prices and lower caps. Although I will say that I’ve noticed in the last three months that the percentage that were going up or compressing in the last 12 to 18 months is beginning to tighten. We’re also seeing a good number of deals that are under contract or LOI that are coming back to market. That’s a result of the incredible compression we have seen in the last 12 to 18 months.
GlobeSt.com: Is it hard to find good deals in this market?
Breslin: It is. I’m handling several 1031 exchange clients right now. I can’t remember a time when it’s been this difficult to find high-quality tenants with longer-term leases in the marketplace. There is a scarcity of good supply. We’re seeing more and more second generation properties with shorter-term leases and a little more complex deals than your average investor would like as far as debt assumptions or shorter-term leases. It’s certainly making it a challenge in this environment.
GlobeSt.com: What are the main tenants you see expanding right now?
Breslin: A lot of my clients and the deals I have been working on are smaller necessity retailers such as dollar stores and fast food restaurants, a lot of the typical national names. It’s pretty much the same names, Dollar General and Family Dollar, that are expanding the most rapidly. The auto parts retailers, it’s the top three, AutoZone, O’Reilly Auto Parts, and Advance Auto Parts. They’re all expanding in a similar format. In fast food we’re seeing expansion mostly in companies like Five Guys, they’ve got over 1,000 units in development; Panda Express has been expanding with 950 new stores they are planning to build in the next couple of years; Chick-fil-A has expanded pretty rapidly; Panera Bread is expanding quite a bit; Carl’s Jr. plans on adding 300 locations in Texas over the next couple of years; and In-N-Out Burger is expanding in Texas. Most of those names clients are interested in.
GlobeSt.com: Are there any concepts you are seeing enter the sector more than before?
Breslin: The smaller-format grocers. Walmart has started to get into the arena. They’ve got their Walmart Express component which is 1,500 square feet to 20,000 square feet. They’ve started in some urban areas bringing them out. We recently sold two in the Chicago area, and there have some in L.A. and some of the other major markets coming in. Trader Joe’s has been expanding pretty rapidly. You do see the grocers trying to get into those infill core locations and compete for business.
GlobeSt.com: Is it easier to negotiate with tenants in this environment than it was in the past?
Breslin: Yes and no. I’m not actively involved in lease negotiations myself, but from what I hear from my clients, depending on the area the property is located in, a lot of the smaller necessity retailers have been expanding because they are able to negotiate good lease rates, particularly in secondary locations. But once you get to your core, infill locations, I would say not as much. There is strong competition for those locations as the real estate becomes more dynamic. It’s more competitive.
GklobeSt.com: How does the West Coast fare compared to the rest of the country? Is it more competitive?
Breslin: It is more competitive. From what we’ve found people want to be in Southern California or the San Francisco Bay area and are willing to pay lower cap rates to be in those areas because of the demographics and the lower vacancies. It’s just the nature of the area – higher barriers to entry. It’s definitely more competitive. There is definitely less supply of quality assets. When a property does hit that is quality, net-lease property in those areas usually garners multiple offers. As far as the transaction volume, it’s pretty evenly split as far as the other regions. A lot of money from investors in California are going into other markets seeking higher yields. There’s a lack of supply.
GlobeSt.com: What are your main goals for the ICSC Western Division Conference?
Breslin: The main objective is to find the trends that the brokers and other people in the industry are seeing. We will also network with brokers and meet new people that we might not ordinarily come across.
For an irreverent look at the ups and downs of the retail industry, check out Counter Culture authored by GlobeSt.com Editor, Ian Ritter.
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