NEW YORK CITY—It's been no secret that domestic investors arevying for single-tenant retail properties as low-maintenance,high-yield places to place their money. Now, foreign players areentering the fray. That's the view of Scott Hook,executive director at Coldwell Banker CommercialAlliance.

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As part of GlobeSt.com's coverage of this year's ICSC New YorkNational Deal Making conference, we met up with Hook for thisEXCLUSIVE interview. (Coldwell will be presenting at booth536.) Hook told us why foreign investors are interestedin this asset class, what parts of the country they are looking inand what the future will bring for the single-tenant retailsector.

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GlobeSt.com: You have said there is interest fromforeign investors in the single-tenant retail space. Why isthat?

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Scott Hook: There has been recentlyconsiderable interest from foreign investors in the single tenanttriple net retail product. The velocity of transactions have pickedup over the past 12 months and should continue for a minimum of 12to 24 months or longer. Why? investors and businesses inChina are seeking yield and safety while the oncedouble-digit inflation has narrowed to 6% or lower (as some sourcessay). The economy is overheated, and frankly, a stack of cardsalready starting to tumble. The government, for years, hasartificially stimulated their economy with theirpolicies. Many investors desire to move their capital to theUnited States. The California economy issafe, diverse, in close proximity to China, and in past 10 years,we have seen a dramatic growth in university population fromforeign students – many from Asia in general. Investors inChina, Korea, and other Asian countries have followed the studentmigration with capital migration. I do not see this changinganytime soon.

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In fact, we see Chinese and Korean banks being aggressive inlending on the single-tenant properties. Case in point was arecent sale by Hook Retail Advisors of aSmart & Final grocery store to a Koreaninvestor whose Chinese bank closed the $8-million purchase inapproximately four weeks with no estoppel or SNDA (subordinate,non-disturbance and attorney agreement). The smallersingle-tenant properties are popular for foreign individuals whowish to protect their gains, while establishing a “foothold” inAmerican real estate. Single-family home buying for rentals infamiliar communities to the Asian investor is also popular.

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GlobeSt.com: Are there particular areas of thecountry where these investors like to put theirmoney?

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Hook: To my knowledge, foreign capitalprefers to purchase properties in regions surrounding largerdominant cities, whether it's Los Angeles, New York, Chicago,Miami, Dallas, San Francisco, or others. However, I believeNew York, Northern California, and the Greater Southern Californiabasin garner a large share of foreign capital. A few reasonswhy are: the size, diversity, and performance of the economies inthe individual markets; the current and projected growth of the“demographic plate;” and the volume of academic institutions in theregions which attract top-tier students from abroad, with companiesin tow waiting for their graduation. Thus, universities are adriving force of the population and business growth, of which anincreasing share is coming from foreign expansion and migrationinto the United States.

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GlobeSt.com: Have we seen a difference in how USinvestors are targeting these assets?

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Hook: Overall, we have seen a dynamicshift over the past 10 years from investors dabbling in tediousproperty management of apartment buildings, office buildings andlarger retail centers to the single-tenant or two-to-three tenantprime, irreplaceable retail buildings, which perhaps are padbuildings located in front of Walmart,Costcoor lifestyle-entertainmentcenters.

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We also see high interest in purely premium product withtop-tier tenants at intersections within higher income cities andmostly “infill,” with literally no additional retail zoned landavailable, yet near dense housing, good public schools and freewayaccess to job centers. Case in point is a new three-tenanttriple-net free-standing retail building in prime South OrangeCounty, CA. Located at the on and off ramp signal toInterstate 5 and fronting the main corridor, essentially thegateway to the prestigious city of Mission Viejo and severalneighboring cities, the property provides several advantageousfeatures. These include diversity of income (three tenancies),stability (a mere 2% retail vacancy rate), minimal management (NNNleases on a new class A building), a hedge against inflation(annual rental escalations) and long-term value growth (the onlyshops building at the intersection, no additional retail land,$150,000 annual household income and a master-plannedcommunity). The majority of the eight offers received are fromforeign investors familiar with the Orange County region. This typeof property in premium areas of Southern California currentlytrades at a 4.5% to 5.5% capitalization rate and should continue todo so in 2015.

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GlobeSt.com: Due to increased demand, are investorswilling to take on tenants that aren't has high credit than theymight have considered before?

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Hook: The increased global demand,combined with the shortage of deliverable retail product, naturallypoints to more risk absorbed by the investor. Purchasers areconsidering single-tenant leases guaranteed by franchisees ratherthan the parent company; buying properties with local or regionaltenants who have five, 10, or 15 units; but not a public or largecompany; and investors are utilizing the historic low interestrates to leverage once again and rationalize paying record-lowcapitalization rates and, conversely, exceedingly highprice-per-square-foot values. Investors in general desire an “addedvalue” component, but the majority are settling for 5% to 6% yieldsafter debt service for class A, well located, top-tier tenantedretail product in Southern California and other major marketregions.

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GlobeSt.com: As a result of all of this, do you seethe single-tenant retail sector overheating?

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Hook: The single-tenant market shouldcontinue to flourish for some time due to the continued globaldemand for American commercial real estate, the great “generationaltransfer of wealth” which has been taking place in America andshall continue, and the actual tenant demand for new prototypeformats and new concepts which continue to evolve and be introducedto the well-capitalized US economy. Tenants nationwide arebeing forced to look at their “box,” their platform, their storesize, layout and locations. As such, there will be a continueddemand from the tenants for new construction. Developers will bebusy in redeveloping sites for the tenant demand for newstructures. Also, the continued population growth andrealignment, in large part from foreign migration, will propeltenants and developers to fulfill the needs of the ever-changingface of America and the birth of new communities. Lastly,while interest rates globally remain low, and the worldwideinvestor climate seeking after-tax yield, single-tenant real estatewill continue to be a popular investment. Long-term leaseswith corporate-credit-oriented tenants will command the mostaggressive pricing. The ability to offset income withdepreciation, plus the monthly cash flow provided with long termlow-interest financing, is quite attractive compared to thealternatives.

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