Shopping Center Business is the leading monthly business magazine for the retail real estate industry.
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NET LEASE 210 • SHOPPING CENTER BUSINESS • May 2017 exchange ranks that need at least 50 per- cent debt — particularly if they're trying to acquire a new drugstore ground lease that has a flat lease rate for 25 years, Hipp says. Underwriting and still-low cap rates could generate an annual return of only around 2.5 percent, he says. "In five years with inflation and higher interest rates, you could effectively be at a negative return," Hipp points out. "So we're having issues with flat leases, and we're seeing some disconnect from de- velopers who think they should still be trading at the low cap rates of a year or two ago." That has sparked more demand for as- sets with built-in rent increases, particular- ly in the restaurant category, Luther says. He predicts that developers will begin building higher yields into their projects, which in turn will lead to higher rental rates. "The good news is that along with rising rents, tenant sales have been improving in many categories," he says. "The bright spot again being in the food use category." SUPPLY IN CHECK Overall retail and food service sales grew 4.1 percent in 2016, and food users represent some 27 percent of the 29.2 mil- lion square feet of new net lease construc- tion last year, according to CBRE. CBRE and Marcus & Millichap researchers an- ticipate that modest supply constraints and demand from tenants outstripping new construction will help to maintain a relatively balanced net lease investment market. The health of net lease tenants starkly contrasts that of Macy's, JC Penney, Sears Holdings and other traditional retailers that are in the midst closing stores, Rose observes. Operators like California-based Trader Joe's and German grocery con- cepts Aldi and Lidl are expanding in the U.S., and plan to open hundreds of stores over the next few years, while dollar stores and restaurants intend to continue expanding, he says. "You have mixed messages in the mar- ket. One is that, 'Oh no, retail stores are closing,' and the other is, 'No, we're opening new units,'" says Rose, whose team is marketing a Target Express (Tar- get Corp.'s smaller infill concept) in Burbank, California. "Many retailers are bullish, but I think one of their problems is that they're just having trouble finding locations." If operators find the right new loca- tions, however, a barrage up of new sup- ply would add upward pressure on net lease cap rates. Ultimately that could lead to a more jarring cap rate shock unless net lease buyers and sellers find a middle ground on prices and overcome an en- trenched bid-ask stalemate. SCB Please call us to discuss how we can become an asset to your brand: Scott Lifschultz 917-575-9894 mobile | scott@splrealty.com BRE# 01861113 Please note new address: 1810 14th Street, Suite 212, Santa Monica, CA 90404 www.splrealty.com TENANT REPRESENTATION & BEYOND REAL ESTATE STRATEGY | MARKET RESEARCH & ANALYSIS SITE SELECTION & NEGOTIATION TRANSACTION MANAGEMENT | PROJECT LEASING For over 25 years we have been a trusted source for brands expanding throughout the United States Now serving these brands throughout Southern California: Past and Present Clients Include: