Single-Tenant Retail Cap Rates Headed for a Plateau

Despite the retail bankruptcies and concern about back-filling box spaces, cap rates for single-tenant retail properties have continued to compress. Bill Asher, an EVP from Hanley Investment Group, is on the front lines of investment sales for the asset class, and recently brokered the sale of a Rite Aid property in Antelope Valley at a record low cap rate—a trend that is becoming more common in the market. However, Asher says that cap rates may be plateauing, especially as a result of the recent interest rate increase. To get more insight into the single-tenant market, we sat down with Asher for an exclusive interview.

GlobeSt.com: What is continuing to drive cap rates down in this single-tenant NNN retail? Bill Asher: The lack of a supply of quality inventory for prospective buyers to choose from that is leased to national credit tenants with long-term leases and scheduled rental increases in the initial lease terms, along with minimal or no landlord responsibilities. Additionally, the continued velocity of apartment and industrial owners selling at compressed cap rates and trading into passive retail investments have driven cap rates down or kept them steady in 2017, depending on the retail category. Months leading up to the election in November 2016, investor demand was tepid and most prospective buyers had a “wait and see attitude” with most proceeding with caution. Cap rates and pricing for single-tenant retail showed signs of softening for 3-4 months. After the conclusion of the election in November 2016, and since January 2017, we’ve seen investor activity bounce back, demand increase, and cap rates in some retail categories actually compress; especially single-tenant Starbucks, specifically those with a drive-thru priced under $4 million are continuing to sell with the most velocity and contain the largest audience of any single-tenant retail investment product in today’s market; therefore, generating the most demand. In California, four single-tenant Starbucks properties sold below a 4.25% cap rate in Q4 2016, and three more closed below a 4.15% cap rate in Q1 2017, according to CoStar research.