Shopping Center Business

MAY 2015

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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288 • SHOPPING CENTER BUSINESS • MAY 2015 Joe Gose Despite compressed cap rates and expectations for increasing interest rates, many experts believe NNN activity in 2015 could surpass 2014. Net Lease Demand Continues Unabated B uyers and sellers are trading net lease properties at a vigorous pace in an environment marked by an abundance of low-cost capital, lofty property values and a lack of alternative income-producing investments. Industry professionals say that the ac- tivity simply prolongs the net lease mar- ket's banner year in 2014. Most anticipate that 2015 could even top 2014 as long as no economic, interest rate or geopo- litical surprises intimidate investors. Like other bullish prognosticators, Calabasas, California-based Marcus & Millichap an- ticipates that lower gasoline prices will al- low consumers to boost retail spending, which will further enhance the appeal of retail net lease properties. Institutional and foreign investors con- tinue to have a strong appetite for drug- stores, auto parts stores, quick-service restaurants, fitness facilities, convenience stores and other retailers. More recently, private buyers such as high net-worth indi- viduals and family offices have increased their net lease property acquisition ac- tivity, says Jonathan Hipp, president and CEO of Washington, D.C.-based Calkain Cos. "The hot streak is continuing," he says. "We haven't seen any evidence of upward movement in cap rates in most proper- ty types. If anything, cap rates have com- pressed slightly and demand for proper- ties is high, especially in core markets." Tom Fritz, a direc- tor with Stan Johnson Co., who is focused on the Midwest from the firm's Chicago office, expresses a similar take. He points out that early 2015 was quite possibly the best time to be a property seller in the last century given the historically low 10- Year Treasury yield, which has given buy- ers more purchasing power. The yield in early April stood at around 1.9 percent after trending between 1.7 percent and 2.2 percent in the first quarter of 2015. "My team is already on track to have a record year in terms of transactions and dollar volume," he says. "We expect the pace to continue going forward." Even energy markets like Houston, which are being challenged by a drop in oil prices, continue to attract net lease in- vestors, say observers. "Our experience has revealed that investor interest for properties in those markets remains high," says Philip Wick- strom, a co-founder and managing prin- cipal of Atlanta-based Net Lease Group, which is marketing properties in Louisi- ana and Texas, including Houston. Rate Squeeze Cap rates generally compressed across all retail categories in 2014, according to Marcus & Millichap, which facilitated nearly 2,065 single-tenant net lease prop- erty transactions valued at $6.9 billion last year. Auto parts stores saw a drop of 60 basis points, with new AutoZone stores fetching prices that represented a 5.5 per- cent cap rate, on average. Cap rates for O'Reilly Auto Parts and Advance Auto Parts stores were 25 to 75 basis points higher. Average drugstore cap rates declined 50 basis points last year, with newly leased CVS and Walgreens stores fetching prices that represented an average cap rate of around 5 percent, according to Marcus & Millichap, which in early April was listing some 880 net lease properties valued at $2.7 billion. Average cap rates for casual dining restaurants dipped 20 basis points to around 6.5 percent, the brokerage reports. Despite flagging sales at McDonald's last year, the restaurant traded at a me- Stan Johnson represented the individual seller and REIT buyer of a Walgreens in Kilgore, Texas, in July 2014. The drugstore chain has leased the property for 25 years, and it has 50 one-year renewal options. Philip Wickstrom Jonathan Hipp

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