Audio: CBRE: Net Lease Tenant Preference in Philly Swings to Convenience Stores, Gas Stations

Michael Shover, left, and Matthew Gorman, senior vice presidents, CBRE Net Lease Practice, Philadelphia, PA

PHILADELPHIA, PA—The pendulum has swung from pharmacies and bank branches to convenience stores and gas stations in the Philadelphia region’s net lease market, according to leaders of the CBRE Net Lease practice here.

In an exclusive interview with GlobeSt.com, Michael Shover and Matthew Gorman, both senior vice presidents in the group, say “c-stores” and gas stations today are developers’ first choice when acquiring strong locations, particularly at signalized traffic intersections.

Listen to our complete interview with CBRE’s Michael Shover and Matthew Gorman in the player below. If you do not see a player, click here to listen to the interview.

“We’ve seen, certainly, a trend in the marketplace where tenants in the c-store, gas station business like Wawa, Sheetz, QuikCheck and others are becoming the go-to tenant for a developer,” says Gorman. “The trend has moved away from the tenants that used to occupy those corners in the not-so-distant past, which were more likely bank branches and pharmacies.”

One reason for the shift has to do with rent escalation opportunities, says Shover.

“I think an important thing that these deals have is rental increases, and it’s something that really differentiates them from the drugstores deals that we were getting done in early 2010,” he says. “Most of these deals have rental increases every five years, and so that’s a positive. There’s been a lot of fear out there of inflation. You own a Walgreens, and that lease is flat for the base term, and that has come out of favor obviously.”

As a consequence, cap rates for pharmacies have moved higher, he says.

“We’ve seen really buyers starting to shy away from those deals, and because of that we’ve really seen some cap rates push up on drugstores,” Shover says.

Section 1031 buyers are avid acquirers of net lease properties, he says. Mostly driven by income preservation, 1031 buyers are interested in a passive income stream that doesn’t require the level of management needed for a shopping center or apartment complex.

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“They are able to sell those assets, roll their proceeds over into something that’s completely passive, and requires, in most cases, none of their time, so they can they can shift their portfolio from something that requires management to something that doesn’t,” says Shover. “They could be passing these assets onto their heirs at some point in the future, and those heirs may have no experience in the real estate business. They may not be actively taking up the reins here, and kind of continuing on with the business that these people have created ahead of them, and so they’re able to pass on these assets to these people, who can own them from anywhere, and not have to have a whole lot of real estate experience to own them and manage them.”

The trend to super-sized convenience stores is also a factor, Gorman and Shover say.

“The convenience store is offering a much larger menu than they did in the past, like made to order food or much more fresh options,” says Gorman. “These convenience stores are operating almost like miniature grocery stores offering all kinds of options. They’re busy basically 24 hours a day, and unlike the traditional retailers who are struggling with competition from e-commerce.”

Rapid expansion of convenience store chains in Philadelphia’s Delaware Valley region has included the arrival of new brands, like Royal Farms, better-known in Delaware, Maryland, and Virginia, moving into locations in Southern New Jersey and eastern Pennsylvania to compete with the better-known Wawa brand.

The demand for locations is driving fierce competition for available land, says Gorman.

“Guys in this field are doing more deals, they’re trying to get out in front of competitors,” he says. “If you’re somebody that owns one of these corners as a landowner and or as a developer, you definitely have seen rents in this sector go up because of that competition.”

Two significant net lease deals for CBRE recently have been a 2.41-acre Wawa site at 555 New Durham Road, Piscataway, NJ, in which CBRE represented the buyer and seller, and a 2.19-acre Sheetz at 91 Erford Road, Camp Hill, PA, where CBRE represented the seller. The Wawa deal, valued at $8.229 million, was new construction with a 20-year lease and an attractive cap rate. The Sheetz, which sold for $3.333 million, was also new construction with a 15-year lease. It’s part of a redevelopment of 16 acres called Camp Hill Commons, which will be the future home of Starbucks, First Watch and Comfort Suites.