Stephen Schrenk, left, director, and Marc Mandel, managing director, in the HFF Net Lease team, Philadelphia, PA

PHILADELPHIA, PA—The net-lease retail market has become very segmented over the past year, according to Marc Mandel, managing director and Steve Schrenk, director, who lead Holliday Fenoglio Fowler's triple-net-lease team in the market.

While overall cap rates may have increased slightly over the past 12 to 18 months, certain property types remain in high demand, the pair write in a recent blog post for HFF. These property types are not limited to, but include:

Gas and Convenience Stores
Grocery Stores
Quick-Service Restaurants (QSR)
Medical-Related Tenants

Traditionally, pricing movement and overall deal volume in the single-tenant market tends to lag the other major property types (multifamily, office and multi-tenant retail), say Mandel and Schrenk.

While transaction volumes may fluctuate heavily in these product types, a strong flow of capital is pouring into the net-lease space, especially through 1031 exchanges.

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The main reason investors find net-lease assets attractive is the limited owner responsibilities, long-term leases, strong credit and attractive rental increases.

One key trend recently is the strong push for shopping center owners to unlock hidden value by the monetization of outparcels through subdivision.

This can take place by the signing of new outparcels leases in larger parking lots where parking ratios are still compliant with existing tenant leases and municipal codes, HFF says.

This has also been taking place on mall redevelopment sites and has become a major component in both office and multi-family development and redevelopment space.

Net-lease grocery stores are also in high demand. HFF says it recently traded a couple of single-tenant Safeway properties over the past few months and was pleased with the high level of activity for these assets. The firm says it is marketing a short-term, net-lease Kroger, and has received multiple offers from opportunistic/value add buyers who are chasing yield while feeling confident in this market segment.

From HFF's perspective, the gold standard and most demanded segment of the net-lease space remains to be low-priced, single-tenant QSRs. These restaurants continue to be in high demand, whether they offer a short-term lease at market or below market rent or a longer-term lease with more than 10 years of term.

With an average price point of between $2 million to $3 million, it seems a strong market will always exist for these deals as there are many buyers in this price range. The buyer pool runs the gamut from high-net-worth individuals, private and public REITS, institutions and various 1031 clients looking to place money or fill their 1031 exchange needs.

Confirming the experience of other net lease experts, including CBRE's net lease team who spoke with GlobeSt.com earlier this week, HFF suggests that pharmacy properties seem to be losing their luster in the net lease space.

In July 2018, HFF found 450 pharmacies on market. Today, the firm says, there are 550 single-tenant pharmacies on the market. The average asking cap rate for these properties fell 18 basis points, from 6.48 to 6.3 percent, while the properties are averaging more than 180 days on the market.

The increase in inventory has several causes, HFF says.

Before Walgreens completed its acquisition of Rite-Aid, investors were hesitant to purchase and sell due to the uncertainty of what they would eventually own. Also, build-to-suit development in the pharmacy space brings higher rents, typically limited rent growth and unreplaceable rent should the tenant ever vacate. Additionally, Walgreens took on an increased level of debt with the acquisition of 1,932 Rite Aid stores, and the uncertainty of store closures proved to be a detriment.

Meanwhile, during this same period, CVS took advantage of the situation and extended many of its leases while reducing rent obligations. The uncertainty continues to mount within the pharmacy space with continued pressure from Amazon and other internet retailers who are taking market share and have spent significant amounts of capital to compete in this space.

Investors are focusing on buying properties at market rents with rental increases in well-located areas, all of which have become increasingly important.

Some net-lease transactions HFF closed recently include:

Wawa: HFF sold an apartment building for a local Philadelphia owner and then successfully executed a 1031 exchange in which the owner purchased a local, net-leased Wawa in Gilbertsville, PA. Both the Philadelphia multi-housing and net-lease teams worked on the transaction.
Citizens Bank: HFF brokered the sale of a Philadelphia MSA bank to a 1031 private investor based in California. This transaction demonstrates the net lease team's national reach and the wide audience that exists for strong national credit tenants.
CVS: HFF brokered the sale of a CVS in Allentown, PA, to a New Jersey-based 1031 buyer, which was sourced through a marketing campaign.
McDonald's: The team assisted in the sale of an off-market, short-term, McDonald's asset in the Midwest. The listing produced a half dozen offers in less than 24 hours due to the scarcity of a value-add McDonald's opportunity.
QuestCare Medical Clinic:This property, which is in the Dallas-area community of Arlington, TX, sold to a 1031 buyer out of California, which HFF teams in both Philadelphia and Dallas procured.
Walmart: This was an off-market transaction in which a portion of the Walmart building was sold in the Pittsburgh MSA.
Safeway: The property, in Arnold, MD, was sold to a 1031 investor out of Texas.
7-Eleven: The HFF team was able to achieve aggressive pricing on this all-cash sale from a New York-based 1031 buyer. A team comprising retail experts from Philadelphia and New Jersey worked with a co-broker on this transaction, maximizing price by bringing the best buyer to the table. The property is in Elizabeth, NJ.
Tesla:The HFF triple-net-lease team represented a buyer on this transaction, and HFF retail experts from Philadelphia and Florida closed the deal for the property in Wexford, PA.

Instant Insights /

HFF: Retail Properties Still in High Demand for Single-Tenant Net-Lease

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