Comfortable Paying More for West Properties?
Part 1 of 2
LAS VEGAS—GlobeSt.com was out in full force at the Stan Johnson Co. party on Tuesday night at ICSC’s RECon event, where Sam Alison, west region director, based in the firm’s L.A. office, noted that the west coast net lease retail market is robust. According to Alison, “retail property sales in Western states during the 12 months ending March 31, 2014, were up approximately 200%—three times greater—as compared to the same period three years earlier.”
As of March 31, 2014, he tells GlobeSt.com, the average cap rate paid for retail properties in the West was 6.6%, lower by 105 b.p. compared to three years earlier. “West Coast-based investors are very active. Research shows that 45% of all net lease retail properties sold nationwide in 2013 were purchased by buyers from Arizona and California. Sellers from all markets should tap into this buyer pool.”
When asked what makes net lease retail properties on the west coast so attractive to investors in today’s market, Alison noted that they “offer investors greater liquidity than other real estate direct ownership options.”
A net lease property is the real estate direct ownership option most analogous to corporate bonds, he explains. “Real estate has certain benefits over bonds like rental increases and depreciation. A major difference between bonds and net leases is terminal value.”
At maturity, he says, the terminal value of a bond is its face value. “At the end of a lease, the net lease investor receives an empty building.”
Historically, he explains, “West Coast real estate has experienced superior rental growth and higher occupancy levels compared to the average of all markets nationwide. Generally speaking, investors are comfortable paying more for properties in western states due to the higher likelihood of finding replacement tenants willing to pay higher rents if a vacancy arises, i.e. the terminal value is higher than the original acquisition price. Obviously, there are markets outside the west where rental growth and high development barriers attract aggressive pricing.”
Check back with GlobeSt.com in the next day or so where Alison talks about how the net lease retail market has changed over the past few years, and who has the upper hand…buyers or sellers and why.
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