Retail Net Lease Buyer Competition to Remain Strong

SAN FRANCISCO—Competition among retail net lease buyers will likely remain strong and keep prices elevated for the best properties offered for sale especially as capital aggressively looks for investment opportunities. That is according to Stan Johnson Co. associate director Marc Barber, who recently spoke with us on the subject in preparation for the ICSC Western Division conference.

GlobeSt.com: How is the state of the lending marketing impacting the ability to close net lease retail deals?

Marc Barber: The general sentiment among investors shows that positive trends will continue for the rest of 2014, especially in the retail sector despite the expectation of rising interest rates. It is widely believed that the net lease industry can handle the expected rise in interest rates without a major disruption. Competition among buyers will likely remain strong and keep prices elevated for the best properties offered for sale especially as capital aggressively looks for investment opportunities. Despite the Fed forecasting that interest rates will increase in the second half of 2014, strong competition has will continue to make interest rates relatively stable.

GlobeSt.com: How has net lease retail investor interest in secondary and tertiary markets changed during the past few years?

Barber: We have found at Stan Johnson Co. that over the past six or so quarters, 30% of all net lease properties that trade are in tertiary markets. This is primarily driven by high quality tenants who are not only located in major metropolitan areas. For instance, many investment grade credit drug, automotive, dollar and restaurant tenants operate in smaller markets. In fact, many tenants in secondary and tertiary markets provide excellent options for people with disposable income that may not be found anywhere else nearby at affordable prices. As shopping online continues to erode spending from traditional brick-and-mortar stores, people in less populated areas depend more on value laden experiences provided by well-performing single tenant net lease retail tenants.

GlobeSt.com: What are the most active secondary and tertiary markets in the West for net lease retail investors?  Why?

Barber: While strong markets like Seattle, Salt Lake City, and Denver have surpassed their pre-downturn employment peaks, other markets in the West have been positively impacted by these jobs. Good examples of the most active secondary and tertiary markets include Tri Cities in Washington, Provo, UT, Boulder, CO, and Tucson, AZ. These places all have well diversified economies that insulated them from the downturn, have had strong job growth over the past couple of years, and three of the locations are home to major universities with substantial student populations.

GlobeSt.com: What are your expectations for 2015 net lease retail market?

Barber: The net lease retail market is experiencing an all-time low for cap rates and buyers are paying the highest premium for investment grade, long-term, and well located assets. Many of these investors are looking for a vehicle to pass wealth onto their heirs vis-á-vis intergenerational transactions. The next coming years will see millions of potential investors focused on net lease that see the sector as an alternative to fixed-income securities. This idea is bolstered by 12 quarters of upward progression in year-over-year volume growth for net lease investment sales nationwide. The average retail cap rate over the last 12 months nationally was 6.61% while in the second quarter it was 6.46%, demonstrating that cap rates continue to compress. Compared to industrial or office, retail cap rates also have been consistently 50 to 75 bps lower over the past four years as well. As the pace of economic improvement accelerates in 2015 and 2016, the number of Western markets in the recovery and expansion phases will increase. By the end of 2017, most retail markets will be in expansion.