Single-Tenant Retail Not Slowing Down

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Single-Tenant Retail Not Slowing Down You are here: Home > Opinions & Columnists > Counter Culture > Single-Tenant Retail Not Slowing Down COUNTER CULTURE Last Updated: May 28, 2014 12:13pm ET Single-Tenant Retail Not Slowing Down By Ian Ritter | National LAS VEGAS—Irvine, CA-based Hanley Investment Group is one of the firms at the forefront of single-tenant retail investment in the U.S. Eric Wohl, President of HIG NNN, the single-tenant net-lease division of Hanley Investment Group, told us about some of the trends he sees in this hot area of retail. He shares the tenants making headway in this sector, the types of investors interested in these assets, the triple-net-lease lending picture and what he's seeing at this year's RECon event. GlobeSt.com: A lot of people consider multi-family and retail the hottest sectors in commercial real estate investment. Are you in agreement? Wohl: If you compare multi-family to the net-lease market, they’re both extremely hot right now. In the commercial real estate world, aside from apartments, single-tenant retail is definitely the commercial sector with the most activity. Net-lease cap rates have compressed in some instances up to 100 basis points over the past 12 months as investors are finally getting off the fence and deploying their capital. They’ve been sitting on the sidelines for the past two or three years, waiting for the right time, and now they are increasingly jumping into a market with limited supply creating a strong pent-up demand for this product type. GlobeSt.com: What tenants and buyers are driving the increased activity? Wohl: Many of the REITs are starting to open themselves up to non-investment-grade tenants due to increased cap rate compression of core tenants such as Walgreens, CVS, O’Reilly Auto Parts, and AutoZone. They’re looking at second and third-tier credit tenants, which opens them up to double or triple the amount of opportunities. Once the REITs start closing on these deals later this year, the private investors will follow suit, driving cap rates lower for this product type. As far as the most active tenants right now, the dollar stores, specifically Family Dollar and Dollar General, continue to lead the charge in newly developed locations and are the most active in this category. On the "In the commercial real estate grocery side, you are starting to see heavy competition in the organic grocery market as consumers continue world, aside from apartments, to look for healthier alternatives. Whole Foods Market is the leader in new development with approximately 35 single-tenant retail is definitely the new stores set to open in 2014, but they will have increased competition from Aldi, Trader Joes, Sprouts commercial sector with the most Farmers Market, The Fresh Market, and Natural Grocers. activity," Wohl says. Pet supplies are another sector on the rise due to rising pet ownership rates nationwide. Petco and PetSmart will both be targeting to open 65-70 locations nationwide this year. This category is seeing increased competition, with smaller regional tenants such as Petland, Petsense, Pet Food Express, Pet Supermarket, and Pet Supplies Plus looking to expand their reach. GlobeSt.com: Would you consider this an area, unlike other sectors of commercial real estate, where new construction is viable? Wohl: Due to the increased demand for net-lease properties, we are seeing a strong uptick in the amount of newly developed projects. Grocery- anchored pads and signalized hard-corner sites are very difficult to find, but once the right site is under control, there’s a high likelihood you will see a multitude of interest from various food and service tenants in today’s market. Over the past couple of years, the market has been outperforming developer’s proforma exit cap rates, which is fueling more shovels in the ground on new developments. GlobeSt.com: If you have a really good tenant, how important is location, or are some retailers just destinations in themselves to which consumers will travel? Wohl: When acquiring a net-lease deal, properly evaluating the long-term viability of that particular location is important. Many of the dollar stores continue to trade at higher cap rates than other net-lease deals due to their mid-block, non-signalized locations in secondary and tertiary markets. Their business model doesn’t require a Main and Main intersection to be successful. Investors in today’s market recognize that and are driven toward the long-term corporate lease and the fact that the tenant chose the location for a reason to overcome the potential objection that the location may be inferior compared to a hard-corner signalized intersection. Typically a bank or drug store is positioned at a signalized intersection location but the difference in rent that a bank or drugstore pays can be significantly higher, which is reflective of the location compared to a dollar store. Overall, it’s important to make sure that the rent the tenant is paying is replaceable should the tenant ever vacate in the future. GlobeSt.com: Other than the REITs, are you seeing any other newer investors step into this arena? Wohl: Investors are realizing how simple it can be to own a single-tenant investment that has zero landlord responsibilities and just collect a check every month. We are experiencing an increasing number of apartment investors making the switch, no longer wanting to handle the day-to-day management headaches. They want to achieve the same or better returns by moving over to a net-lease investment. The same is true for multi- tenant retail, office and industrial owners realizing that they can simplify their lives by selling and exchanging into net-lease investments. We’re also seeing a heavy influx of foreign investors continuing to drive prices up and returns lower. GlobeSt.com: Are the lenders mainly CMBS and banks right now? Wohl: Yes, as well as life companies. The lending environment has returned back to the glory days of 2006-2007, if not even more active than it ever has been. Long-term interest-only is back. I was recently quoted 10 years interest-only in the high 4% interest rate range on a Walgreens in California, which offers an attractive cash-on-cash return of over 6% day one for a passive investor seeking a better yield. These types of available loans are providing investors with more options, even in the low cap rate environment that we are in at the moment. GlobeSt.com: Are you worried about this sector overheating and cap rates getting too low, or is there enough pent-up demand out there? Wohl: Any time you see pricing hike up this quickly, there’s going to be some concern. There are still short-term memories from the last cycle, including the banks and lending institutions, so it’s tough to say. I am not worried about the smaller all-cash transactions that continue to take place with high frequency as those buyers typically are just buying to clip coupons for their retirement. I do have concerns for investors who are buying larger, highly-leveraged net-lease properties with interest-only financing and their ability to refinance in the future, and what the cap-rate environment will look like at that time. It’s hard to see cap rates being able to sustain at this level for a long period of time. GlobeSt.com: What are your feelings about how this year’s RECon is shaping up? Wohl: We’re really excited about RECon this year because, as a company, we have more product in our pipeline than ever before. We are looking forward to showcasing these new listings at our booth. The buzz in the net-lease industry is at an all-time high right now and I believe this sector will be a large focus of the show this year. All facets of the industry seem to be thriving right now so I am expecting an upbeat atmosphere at the convention. To search across all ALM blogs, go to www.Lexis.com. Register now for the GlobeSt.com Retail Alert…Your one-stop shop for retail news and analysis. ABOUT THE AUTHOR Ian Ritter has written about the retail real estate industry since 2002. He was the retail editor and custom content manager of ALM Real Estate Media Group’s GlobeSt.com. Prior to that, he was the national online editor of Real Estate Media’s GlobeSt.com. Contact Ian Ritter About ALM | Customer Support Copyright © 2014 ALM Media Properties, LLC. All rights reserved..
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