Shopping Center Business is the leading monthly business magazine for the retail real estate industry.
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NET LEASE 202 • SHOPPING CENTER BUSINESS • May 2017 C ertain that interest rates are on the rise, real estate professionals are mulling the end of cap rate compression in the retail net lease mar- ket and an emerging bid-ask gulf between buyers and sellers. Couple these changes with no clear view of tax reform or how other fiscal and regulatory polices may af- fect the economy, and the unknowns are prolonging a choppy market that began before the election. Twelve to 18 months ago, net lease assets often fetched multiple offers, says Jonathan Hipp, CEO of Herndon, Virgin- ia-based net-lease brokerage Calkain Cos. Today there's generally less interest. "There are still buyers in the market, but there's not the same velocity," explains Hipp, whose team recently represented an Applebee's restaurant owner in the sale of 14 properties along Florida's Gulf Coast to separate buyers for a total of $46 million. "Buyers don't see capitalization rates coming down (or prices going up) from where they are today, so they don't think that they are losing anything by waiting." Hipp and other net lease brokers are quick to point out that the demand is still sufficient enough to generate net lease sales volume on par with or slightly better than last year. Some $14.5 billion in retail net lease assets traded hands in 2016, a drop of about $4 billion from the banner year of 2015, according to CBRE's U.S. Net Lease Market Trends Report issued in late March. Investors are still enamored by the bond-clipping characteristics of net lease assets, brokers contend. But buyers also are focused on high-quality locations, ten- ants and lease terms, and they are hesitant to buy large big boxes housing struggling retailers or Walgreens locations in light of that retailer's pending merger with Rite Aid. [See sidebar on page 206]. "I think we've seen some institution- al investors hit the 'pause' button," says Ryan Butler, a senior director with Stan Johnson Company in Tulsa, Oklahoma. "If they get back into the market, we'll see it pick up some additional steam." CAP RATE TUG-O-WAR Net lease real estate minds are concen- trating on interest rates and cap rates. The Federal Reserve has raised its federal It's A NNNew Market The net lease sector senses changes, beginning with upward pressure on cap rates. Joe Gose Calkain Cos. facilitated the sale of two Florida Dunkin' Donuts assets to an existing franchisee and a private investor late last year, fetching more than $1.3 million for one in West Palm Beach (pictured) and slightly less for the other in Chiefland. Calkain's Doug Aronson represented the institutional seller.