[IMGCAP(1)]

HUNTINGTON BEACH, CA—There's a huge demand for quality, low- or no-management real estate, especially in the Southern California market, Joe Linkogle, VP investments, and Adam Friedlander, senior associate, with Marcus & Millichap tell GlobeSt.com. Following the recent announcement of the firm's achieving a record-breaking sale price for a net-leased Walgreens here, we spoke with the pair about the deal and why net-lease properties are in such high demand.

GlobeSt.com: What is responsible for the record-breaking sale price on this net-leased Walgreens in Huntington Beach?

Linkogle: There is an enormous demand right now for quality, low- or no-management real estate. There's a ton of money out there that's chasing these single-tenant deals, especially when they're in good areas and with a good-credit tenant. For this deal, the tenant has 21 years remaining on the base term of the lease, and Walgreens is a good-credit tenant. It's also a great corner with great demographics and traffic count. It's good, quality real estate with a lot of visibility.

Friedlander: There's a lack of product out there on the market. There's such a plethora of buyers and a limited amount of quality inventory available, and this was a long-term NNN-lease investment in a trophy location in Orange County with a good tenant. That demanded a premium on this asset. There's not a lot of available product like it. Also, financing is very cheap today, especially if you are a high-net-worth individual. You can get really inexpensive financing with long terms, and this keeps cap rates compressed as well.

[IMGCAP(2)]

GlobeSt.com: Are prices like these becoming typical in this market?

Linkogle: Yes. We have a CVS under contract in Long Beach—which is in L.A. County, but still in Southern California—for a little below a five-cap. It's a smaller price point, but these cap rates have been typical for the past year for sure, and right now, if we had another 10 Walgreens like that, we could sell them quickly. Also, such a high price point and a five-cap on a Walgreens in today's market is not extraordinary in itself, but $16 million for a Walgreens is extraordinary. Paying $16 million for 56,000 square feet—that's an acre and a quarter—that's buying the lease.

Friedlander: The CVS buyer was attracted to this location because it's typical to have a flat rent in place for a CVS, and it did incorporate some rental increases every five years in the base terms and the options.

Linkogle: The CVS was a reverse build-to-suit, so there are increases in the base-term rent for the ground-lease component. The rent is composed of ground-lease rent and reverse build-to-suit rent. It's the price of the property paid by the landowner to Walgreens amortized over the remaining terms of the lease.

GlobeSt.com: What other Orange County submarkets are seeing these types of valuations?

Linkogle: There's no doubt that anywhere in Orange County right now is considered a great or attractive place to invest. We're selling stuff in Laguna—we have a Del Taco five-cap deal—and anywhere in Southern California where there's a single tenant with a corporate lease will command a high price. It's not necessarily an Orange County phenomenon itself—it's Southern California real estate, particularly single-tenants real estate—it's just hot.

Friedlandler: Especially if there are decent lease terms remaining and it's a corporate lease. Cap rates are absolutely compressed and should remain low. There are not a lot of alternative investments for people to put their money into today.