CALABASAS, CA-The viability of net-leased retail properties will hinge on the ability of retailers to meet the demands of cost-conscious consumers. So says Bill Rose, the national director of Marcus & Millichap’s national retail group, who recently exclusively shared the firm’s Q2 Retail Research Net Lease Outlook report with “While more Americans are returning to work each month, personal incomes are relatively stagnate and as a result, the average consumer has become an avid bargain-hunter after the prolonged recession.”

According to Rose, dollar stores and big-box retailers are at the forefront of the current retail environment, due to their ability to offer low prices and maintain healthy profit margins. Initially, he says, dollar store chains such as Dollar General concentrated on entering under-served areas in core markets, but in the last year, however, “these extreme-value retailers have cut into marketshare held by big-box giants such as Walmart with more aggressive expansion plans and comparable prices.”

Rose continues to note that conventional grocery stores have also charted a loss in marketshare recently as big-box and dollar store companies “continue to push into the necessity based market of fresh food and produce.” He adds that an increase in competition and saturation of the food and discount retail markets may not be a zero-sum game, as certain retailers serve a niche that others cannot replicate.”

According to the firm’s retail net-lease report, heightened demand, along with a limited supply of investment-grade assets, will encourage buyers to consider properties with shorter lease terms or non-credit tenants this year. Some REITs are targeting shorter leases after filling their portfolios with low-cap rate purchases and witnessing high-net-buyers bid-up properties, the report says. “Private buyers are often searching for 1031-exchange opportunities in the single-tenant arena, making their timeline to buy much shorter than most REITs. Consequently, the most sought-after properties are sold very quickly with aggressive bidding. Nonetheless, non-credit and franchisee assets will be attractive to all types of investors as a hedge against a potential rise in interest rates.”

The report continues to point out that cap rates for these deals average 100 to 150 basis points above investment-grade purchases, and can reach 200 basis points above debt costs. In addition, “many non-credit and franchisee properties have rent increases incorporated in the lease, while sought-after drugstore deals have flat rent structures in place,” says the report. “Owners who have loans coming due, or are trading out of short-lease properties, will fuel sales of these secondary single-tenant assets that have become so prevalent in the market.”