Investors Flock to Best-in-Class NL Retail
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CALABASAS, CA—Getting more from the same or smaller space is a top priority for retailers in the net lease space this year, although how they achieve that objective varies from company to company. Some are looking at scaled-down floor plans, some are making moves that lead to store closings and a few others, notably in the dollar-store segment, have their eye on expansion. What’s true across the board is that best-in-class assets are much sought-after by investors, says a report from Marcus & Millichap’s National Retail Group.
“Quality net-leased listings will remain in high demand throughout the year, while rising interest rates could begin to dull investors’ appetite at the bottom of the market,” according to the report. The perceived safety of many net-leased assets has encouraged retiring Baby Boomers “to exchange out of management-intensive apartment properties and into net-leased assets secured under long-term leases.”
Accordingly, cap rates for the best of the best in net lease have moved very little in the past several months. On the other hand, the report notes, “Properties with less-creditworthy tenants, meanwhile, could have fewer buyers as rising interest rates expand options for investors seeking elevated returns and the cost of SBA loans increases.”
Even with the specter of higher rates, though, certainly the capital is far easier to come by. “The availability of debt expanded last year and should rise in 2014,” writes William Hughes, SVP with Marcus & Millichap Capital Corp. “For institutional-grade assets, CMBS remains a viable option for investors. Last year, CMBS accounted for nearly half of the retail dollar volume, up from just 8% in 2008."
Although a large share of that activity came from multi-tenant deals, the report notes that net-leased properties can still utilize CMBS. Menawhile, "Local and regional banks have cut into market share from national banks, with each representing 11% of retail dollar volume.”
Within the universe of net-leased retailers, yields and cap rates vary both by store type and within those categories. In quick-service restaurants, for example, “A McDonald’s ground lease will garner attention at first-year returns in the low-4% range, while corporate-backed chains trade at cap rates beginning in the low-5% area and drifting up to the low-6% range,” according to the NRG report.
For another class of net-lease restaurants, those in the casual dining sector, “Cap rates vary widely in the casual dining segment based on tenant and lease terms,” the report states. While corporate-owned properties can change hands in the low-6% range, those occupied by franchisees typically trade at first-year returns that are about 150 basis points higher.
The belle of the ball at the moment is dollar stores, which notably are more bullish on expanding than other retail sectors. “Family Dollar, Dollar General and Dollar Tree will open approximately 1,200 new locations in 2014,” says NRG’s report. More than 500 of those planned openings will come courtesy of Dollar General.
Deal flow for dollar stores rose by 56% during the most recent 12-month period as investors chased yield, while the median price for these properties held steady at $119 per square foot. In the near term, says the NRG report, “Dollar stores will be a primary target for investors this year due to the prevalence of available properties with full-term leases. Additionally, elevated cap rates will make dollar stores a favorite acquisition of REITs and private buyers.”
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