IRVINE, CA—The retail-investment market'stemperature varies according to property type and location, butsingle-tenant retail is one of the hottestsub-sectors, Nicholas Coo, senior managingdirector of Faris Lee Investments, tellsGlobeSt.com. We spoke with Coo about the various property types andhow his firm advises investors and sellers to get the most out ofan asset.

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GlobeSt.com: Nick, tell us about the retail propertymarket right now. Is it a buyer's or a seller's market, in youropinion?

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Coo: There's a multifaceted answer tothat question. Some segments of the market are at unprecedentedhighs in pricing. Other segments are in equilibrium where benefitsare strong for both parties. The seller's market is at itsstrongest in the single-tenant category, largely within theultra-urban core MSAs and also across the country for NNN assetswith credit tenants. For example, an Apple storeon the iconic Third Street Promenade in Santa Monica, CA sold for a3% cap rate recently. That trade blows away all conventional retailcap-rate thresholds for an asset of its size. With other propertytypes—anchored or unanchored retail outside of what we wouldconsider a top-tier urban location—we are seeing more equilibriumwhere both parties stand to benefit.

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Lease rates play an important role in the equalization happeningin non-core markets. In the “boom years” of the last cycle, rentswere over-inflated rents across the board—there was minimaldifference between rent rates in core urban markets and secondaryand tertiary markets. The urban and core locations are still aseller's market—they can command premium rents and trade athistorically low cap rates like the Apple example above. But intoday's post-recession environment, lease rates within non-coremulti-tenant properties have “right-sized.” A buyer can acquire aproperty with the confidence that their tenants pay sustainable orreplaceable rents. Tenant stability is obviously a key factor ingarnering a favorable return, particularly over a long-term hold.So, in these types of markets, there is more of a “fair trade”environment among buyers and sellers.

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GlobeSt.com: How does Faris Lee advise investorsseeking out an asset?

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Coo: We get to know the investor, andwe work through their goals and objectives first. We treat everyinvestor differently based on their needs. Some are more securitydriven; others are looking at assets for a generational purchase,while others are looking for value-add investments.

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GlobeSt.com: How do you advise sellers on gettingthe most out of their asset?

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Coo: We look at the whole market. Ourretail-brokerage platform is one dimension of Faris Lee. If itmakes sense strategically, we will place investors into otherproperty segments. We take a global market perspective onreinvestment and filter that back to the investors' goals andobjectives.

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For example, we were engaged to advise a private realestate investment client on their retail asset in OrangeCounty. We devised a reinvestment strategy which considered allasset types. We then identified a 20-unit apartment asset locatedin Northern California prior to the close of their Orange Countysale. We designed a reverse 1031 exchange whichaccommodated the acquisition of the asset prior to selling theirOrange County retail center. In this case, theapartment asset stood to provide a 20% IRRutilizing conservative underwriting. It was a better use of capitalto sell the Orange County retail asset and buy an apartment assetin Northern California. The relinquished asset at the time hadeight tenants and two suites vacated during escrow. It was a greatprice for the seller because of the upside and redeployment ofequity. And it was a good investment for the buyer as well due tothe ultimate return upon stabilization.

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Ultimately, if we can execute with certainty for the seller anddevelop a business plan for the buyer, we're benefiting bothparties.

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GlobeSt.com: What types of properties are the mostsought after and why?

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Coo: I've personally witnessed thatthe industry has been hitting record levels in demand andacquisition volumes. Demand is coming from the same two segments wehave historically witnessed drive the market—the security-drivenbuyer and those seeking value-add opportunities who are willing totake higher levels of risk. The security-driven buyer wants a newproduct with solid tenants—in which case they're buying into lowmanagement and lower risk due to the tenant's credit—and thatincludes single-tenant buyers. Then, there are those investing inreal estate who have a business plan and are looking to accentuatereturns. This second type of buyer is seeking a property withvacancy or with a difficult configuration where existing rentalrates are below market, and they're looking to addvalue.

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Visit Faris LeeInvestments at ICSC Western Division Conference in San Diego atBooth #601. www.farislee.com.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.