AZ, Southwest Net Lease, 'Feeding Frenzy'

(This guest blog from GlobeSt.com's Natalie Dolce is part of our lead-up coverage to ICSC Western States.)

SCOTTSDALE, AZ—There are many factors to the Southwest market that lend itself to investors. That is according to Stan Johnson Co. associate director, Brad Richardson. According to Richardson, who is based in Scottsdale, AZ, the proximity to Californian investors and their capital is the primary driver. We recently chatted with the Scottsdale, AZ-based net lease retail expert in preparation for the upcoming ICSC Western States conference.

GlobeSt.com: How would you describe the state of the net lease retail market in Arizona and the Southwest?

Brad Richardson: As is the case in most parts of the country the state of the market in Arizona and the Southwest could be described as a feeding frenzy with properties being sold at near record cap rates. The shortage of new net leased product along with a large buyer pool equipped with cheap debt has created a historic market for sellers. The large amount of institutional and exchange buyers focused on acquisitions in the Southwest have made it difficult to source deals. In most cases deals are sold prior to hitting the market. The product hitting the market are typically second or third generation properties with shorter term leases. 

GlobeSt.com: What makes net lease retail properties in Arizona and the Southwest attractive to investors in today's market?

Richardson: There are many factors to the Southwest market that lend itself to investors. The proximity to Californian investors and their capital is the primary driver. A very high percentage of Southwestern properties are acquired by Californian investors looking to capture additional yield in a market within an hour flight. The other factors include macro-economic conditions of the Southwest markets. The long-term population growth of the Southwest along with its pro-business atmosphere make it a desired destination for most investors. 

GlobeSt.com: What Arizona and Southwestern markets are you seeing the most investor interest for net lease retail properties? Why?

Richardson: Phoenix is very attractive to investors since it is the largest and most active market in the Southwest due to its overall population growth and long term business trends. The Phoenix market has experienced a healthy rebound in the housing market and employment figures which have had a large influence on the overall market. Even though markets like Phoenix and Las Vegas were some of the most depressed markets in the country during the recession they have both rebounded well and are highly desired locations for investors. 

GlobeSt.com: Who hold the upper hand with net lease retail properties in Arizona and the Southwest -- buyers or sellers? Why?

Richardson: Sellers hold the advantage in today's market because of the significant difference between the supply and demand. It is a great time to be a seller as many properties are being sold at record cap rates and buyers are willing to accept very aggressive terms. The two main factors are the lack of new supply in the Southwest and large amount of buyers. The supply may not change in the near future as many retailers are still expanding at a fraction of the pace from 2004-2007. The large amount of buyers in the market is due primarily to the debt markets and the ability to get cheap financing. The 1031 exchange markets have been driven by sellers of multi-family properties where there are debt options in the three percent range. The debt markets also affects the ability for institutional investors to raise capital and place debt on properties after closing. Overall if I was an owner of net leased property and not a long-term holder I would consider selling in today's market.