Why Single-Tenant Transaction Volume Is Thriving

The single-tenant transaction count for the first half of 2023 was the fifth-highest tally since 2000, according to Marcus & Millichap’s 2H 2023 U.S. Single-Tenant Net-Leased Retail National Report.

Furthermore, single-tenant trades accounted for nearly one-fourth of all primary commercial real estate deal flow during the 12-month period ending in June and its share of total trading exceeded its prior yearlong proportion, when 21 percent of all sales involved a single-tenant asset.

Monthly core retail sales, which exclude gas and auto purchases, have exceeded $500 billion seven times since January, after having never exceeded $500 billion.

Marcus & Millichap said this reflects consumers’ prioritization of necessities and dining out during the first nine months of 2023.

Brandon Svec, national director of U.S. retail analytics at CoStar Group, tells GlobeSt.com that the combination of minimal new supply and strong demand coming out of the pandemic has put the single-tenant retail sector in its tightest fundamental position on record.

“Consumer demand for convenience – which has driven record consumption of food out of the home – coupled with the greater adoption of food delivery and online ordering apps has driven a significant uptick in demand for space from restaurants, especially QSRs,” Svec said.

“At the same time, demand has also risen significantly from other retail sectors including automotive parts, discounters, small-format grocers, and medical/urgent care users.”

This has provided landlords with significant pricing power when leasing available space, which has driven average asking rents to record highs.

“However, with leases typically being longer term and a lack of available space on the market, opportunities to push rents at a pace above standard escalators are relatively infrequent in the single-tenant space,” according to Svec.

He said with construction costs remaining high and construction financing costs shooting through the roof, “new construction starts on single-tenant assets have been falling throughout 2023, setting the stage for continued tightness in the single-tenant space for the foreseeable future.”

Indeed, net lease investors are actively seeking deals that are trading based on lower rents and lower development costs because of new projects’ long lead times and higher costs, says Andrew Fallon, SRS Real Estate Partners, National Net Lease Group, Executive Managing Director/Market Leader, Washington DC.

“In high barrier-to-entry markets, like Northern Virginia, we are seeing the most demand based on scarcity of new deals, and the favorable outlook for the region in terms of stability, consumer spending, and retailer success,” he tells GlobeSt.com.

Meanwhile, demand is rising in secondary markets, which is where a majority of new construction of these assets is occurring, Joseph M. Miller, managing director, Partner Valuation Advisors, tells GlobeSt.com.

“These markets typically have lower barriers to entry, which results in an overall lower rental rate compared to major cities, and places downward pressure on cap rates,” Miller said. “In some of these markets, it is not unheard of to see cap rates the mid 4s and low 5s, depending on the term, rent, and tenancy.”

He said the single-tenant net leased asset type typically attracts a large pool of interested buyers from individuals to large investment funds.

“Many investors look at strong corporate-backed leases as relatively safe investments with lower risk of default,” Miller said.

“There is some ambiguity in the marketplace around the Rite Aid bankruptcy, which could cause a temporary shift in the marketplace, but overall, I believe this market will continue to show strong economics.”

Restaurants, particularly eateries with drive thrus are another property type that is thriving amid strong single-tenant demand, says Tanner Olson, managing partner, Legend Partners.

“Single tenant operators often have stronger credit. Multiple groups competing for the same A+ pad sites mean the ground is where the value truly lies. I advise every buyer to ask themselves, ‘What do I do with this asset when the initial lease term is up and can I replace that rent?’ ”

Greg Lyon, the Chairman & Principal of Nadel Architecture + Planning, tells GlobeSt.com that there continues to be pent-up demand to go out and socialize following the pandemic years.

“While costs of ground-up construction remain high, we expect this trend to continue fueling single-tenant retail activity, particularly in the dining sector,” Lyon said.