CORONA DEL MAR, CA—2015 was an unprecedented year with the compression of cap rates and achievement of historic sales prices in the single-tenant retail category, says Orange County-based Hanley Investment Group EVP Bill Asher. GlobeSt.com sat down with Asher to discuss the retail investment market outlook for 2016 in the net-lease category.
“Although the frothiness of the market may have slowed, single-tenant retail assets are still in high demand nationwide and have transacted with the highest velocity out of any particular retail investment type for the last three to four years,” Asher said. “Passive private investors continue to drive the market with acquisitions of single-tenant banks, drug stores and fast-food restaurants leased to corporate tenants situated in prime locations featuring long-term leases.”
A primary example, Asher tells GlobeSt.com, is in the single-tenant NNN drug store category (Walgreens and CVS) in California where approximately half of the sales resulted in cap rates that crossed over from the 5% cap rate range into the 4% cap rate range. Those drug store investments that commanded a “4” in the cap rate contained a minimum of a 15-year lease term remaining, absolute NNN structure (tenant covers all expenses including roof and structure) and increases in the remaining initial lease term.
In Los Angeles County, GlobeSt.com reported that Hanley Investment Group completed the sale of a single-tenant absolute net-leased Walgreens property located in Huntington Park in March 2016. The purchase price was $11,850,000, which represented a cap rate of 4.22%, the lowest cap rate ever for a single-tenant Walgreens in Los Angeles County priced over $10 million and one of the lowest cap rates for a fee-simple Walgreens nationwide, according to Asher.
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“The same examples could also be easily identified with the sale of single-tenant banks (Bank of America, Chase, Citibank and Wells Fargo), coffee (Starbucks, Coffee Bean and Dunkin Donuts) and fast-food restaurants (Chick-fil-a, McDonald’s, Carl’s Jr, Del Taco and Jack in the Box) – all consistently selling in the 4% cap range with a select group getting as low as the mid to high 3% cap range,” said Asher. “The compression has been tremendous and has surpassed the records of the last cycle experienced between 2006-2007.”
Asher said that the compression of cap rates has also translated to prominent grocery-anchored shopping centers, which have transitioned into the high 4% cap range (in California) from consistent pricing in the 5% cap range, depending on tenancy and location. Additionally, quality multi-tenant strip centers leased to corporate tenants dipped down consistently into the 5% cap range last year.
“2016 is projected to be another record year in the industry,” said Asher. “The Fed’s decision to raise interest rates by 0.25% in December 2015 was expected and, as of May 2016, only one additional rate hike is projected for the remainder of this year. We don’t anticipate any slowdown in investment sales activity and, if anything, a significant surge going into the 3rd and 4th quarters of 2016. However, with an anticipated increase in the supply of overall product, 2016 may not be as robust as 2015 in regard to record pricing, but it will definitely be a year for buyers and sellers to transact. We expect to see a 5%-10% increase in transaction volume compared to 2015 as cap rates remain at historic lows based on continued demand.”
Visit Hanley Investment Group at Booth #S381S at ICSC RECON in Las Vegas.