Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/536709
37 July | August | 2015 CCIM.com How low can you go seems to be the capitalization rate question in the single tenant net lease market. Particu- larly for retail properties, cap rates have reached historic lows, according to the f rst quarter 2015 Boulder Report, which reports a retail cap rate of 6.40 percent, 10 basis points below 4Q 2014's rate. Strong demand for STNL retail properties is being propelled by private and Sec- tion 1031 investors. But the bigger problem, according to CCIMs partici- pating in the net lease roundtable discussion, is the lack of available product. Seller hesitation, among other issues, is helping to limit the amount of available product, as is current speculation about interest rates and their ef ect on the STNL market. Commercial Investment Real Estate discussed interest rates and other STNL issues with four CCIM designees active in the net lease market: Nancy Miller, CCIM, senior vice president, National Net Lease Investment Group, Bull Realty, Atlanta; Camille Renshaw, CCIM, senior director and lead broker for the New York City of ce of Stan Johnson Co.; George L. Renz, CCIM, owner/ broker of Renz & Renz Investment & Commercial Brokerage in Gilroy, Calif.; and Ken Wimberly, CCIM, chief visionary of cer for KW Net Lease Advisors in Fort Worth, Texas. CIRE: Describe the state of STNL activity in your market today, based on your experience. George L. Renz, CCIM: T e STNL market is very active but not balanced. Due to a high number of Section 1031 exchanges, low construction levels and supply, well- priced f nancing, and other factors, there are far more buyers than sellers. T is is not only a California trend but a national trend. Camille Renshaw, CCIM: It's very hectic, with cap rates continuing to compress in the lower credit tranches. Ken Wimberly, CCIM: Extremely aggressive. For top quality assets, we are receiving multiple of ers and prices are still trending up. CIRE: What is the STNL cap rate environment in your market? Is it affecting buyer decisions? Nancy Miller, CCIM: We are seeing a slight increase in cap rates in the dollar store sector in more tertiary mar- kets. T e recent uncertainty of the Family Dollar buyout caused a glut of dollar stores on the market — both new construction and existing stores — while buyers and sellers waited for the outcome. [Dollar Tree acquired Family Dollar Stores.] T e 1031 buyers have entered the market again, af er a slowdown in the last two years. T ey are forced to consider lower cap rate replacement properties with lower yields. First-time or non-1031 buyers have unrealistic cap rate (higher) and lease term (longer) requirements. Many of them are staying on the sideline unless they are able to use leverage to purchase. Low interest rates make up, in part, for lower cap rates. Renz: Cap rates are at historical lows but stable. NNN cap rates have always been lower than some investment types, but then STNL is usually about stability. Of en buy- ers are all cash so the vehicle is as important as the cap rate; primary concern is security. In California a typical cap rate on a long-term lease with a quality tenant would be 4 percent to 5 percent. Renshaw: Many buyers are f nally able to sell lower credit deals or weaker assets that they may have had to hold through the recession; they are bringing their 1031 exchange dollars to our sector, creating intense demand for product. T e market is very competitive. Wimberly: Several of our clients are walking away from deals they would have completed a year ago, due to worries about increasing interest rates af ect- ing their long-term returns. It is baf ing when we see B-location strip centers with mom and pop tenants and short-term leases being brought to the market at sub-8 percent cap rates. CIRE: What types of STNL transactions are most prevalent in your market today in terms of tenant and lease length. Renshaw: We are seeing the most activity in retail, although demand in industrial equals it; there's just less product. Buyers need more certainty of lease longevity for of ce assets. Wimberly: We still see lots of short-term dollar stores trading in the market and quite a few quick-service res- taurant franchisee sale-leaseback transactions being pro- posed with 20-year lease terms. Luke Sharrett/Getty Images