T. Reed Hudson T. Reed Hudsonsays cap rates have remained fairly flat this year, at or nearhistorically low levels.

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DALLAS—Today's department stores account for roughly 1% of allretail sales, according to a Customer Growth Partnersconsultancy/New York Times report of late last year. In contrast,malls topped occupancy lists back in the 1980s, holding a 10% shareof all US retail sales.

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Ironically, that is the share that e-commerce currently holds,according to a recent report by Weitzman. Given these e-commerceimpacts on the mall sector, Texas net-lease product continues toshow impressive demand, says T. Reed Hudson, associate director ofStan Johnson Company, in this exclusive.

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GlobeSt.com: How have the sustained interest rate cutsof 2019 impacted investment demand within the retail net-leasemarket in Texas?

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Hudson: Of course, interest rate cuts haven'thurt investment demand, but I think it has had more of an impact onhow investors are now looking to acquire net lease deals. I've seennumerous situations where an investor would previously have onlyconsidered acquiring a deal all-cash, but now due to interest ratecuts, they are looking to leverage the investment with attractivefinancing.

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GlobeSt.com: What kind of cap rate movement have youseen on these properties over the course of the year?

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Hudson: I think we have seen some smallcompression of cap rates for very well-located, strong credittenant investments–I'm talking 10 basis points maybe. In general, Ibelieve cap rates have remained fairly flat this year, at or neartheir historically low levels.

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GlobeSt.com: How did the overall deal volume of 2019 inthe Texas net-lease retail space compare to that of 2018, and towhat do you attribute the difference?

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Hudson: The single-tenant net lease retailsector reported $1.49 billion in sales during 2018 across the stateof Texas. In just three quarters of 2019, the Texas market matchedthat level of transaction volume. In fact, the state's strongestquarter of activity in history was reported during Q2 2019, with$745 million in single-tenant net-lease retail sales reported.There are various contributors, but we've seen strong demand fromnet lease REITs for big-box retail assets in Texas this year, andexchange buyers are incredibly active in the market.

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GlobeSt.com: What types of buyers are pushing the mostfor net-leased retail assets, and how has the composition of theTexas buyer pool for these assets changed in recentyears?

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Hudson: High net worth/private individuals,many of whom are in 1031 exchanges, remain the most likely buyersof net-lease retail across Texas. We still see a tremendous amountof capital coming from out of state on both coasts of the US.However, we are seeing more and more Texas-based buyers competingfor net-lease assets than in years past. A large portion of thembeing 1031 investors who are taking advantage of the demand forTexas assets by selling their properties at premium pricing andexchanging into another investment in Texas, due to theirfamiliarity and confidence in the market here.

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GlobeSt.com: The impacts of e-commerce on big-box andmall retail have been profound. To what extent have you seeninvestors shy away from properties net leased to retailers that arevulnerable to online shopping?

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Hudson: I would say to a large extent,especially over the past 12 to 24 months. However, it seems thatwhile investors are aware that the dynamics of retail shopping haschanged, they are also realizing that brick and mortar retail isnot going away, and there is still going to be a need and demandfor it in the future.

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GlobeSt.com: How have consolidations and mergers withinkey net-lease categories (banks, pharmacies, etc.) impactedinvestor demand for these assets in Texas?

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Hudson: It doesn't feel like Texas has beenquite as impacted as other geographic regions of the country inrelation to bank and drugstore consolidations. We are still seeingstrong demand for credit banks and pharmacies in the Lone StarState.

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Lisa Brown

Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.