Shopping Center Business

MAY 2016

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NET LEASE 168 • SHOPPING CENTER BUSINESS • May 2016 about price reductions that we just haven't seen in the last four years," explains Schro- eder, whose team closed 65 transactions valued at $200 million in 2015. "There's a feeling that the market is going to cor- rect, and nobody wants to be the guy that paid too high a price just before the correction." EXCHANGE TRADE FRENZY Boulder Group research indicates that cap rates for net lease properties con- tinue to compress, but more stubbornly than in previous quarters. Median asking retail net lease cap rates dropped 25 ba- sis points to 6.25 percent in the first half of 2015 and then remained at that level in the second half of the year. In the first quarter of 2016, asking cap rates ticked down seven basis points to 6.18 percent, the brokerage said. The slight drop in cap rates in the first quarter occurred despite the Federal Re- serve Board's decision in December to raise the target range for the federal funds interest rate to 0.5 percent from 0.25 per- cent, and net lease professionals expect 1031 Exchange activity in particular to keep cap rates in their current neighbor- hood. The 1031 Exchange program allows sellers of a property to defer paying capital gains taxes if they funnel proceeds into a similar or "like-kind" asset. To qualify, the exchanger must complete the purchase of the new property 180 days after the initial sale. "If a 1031 buyer really likes a deal, they don't care so much about the cap rate on the last trade (of a similar property), they just care about fulfilling their trade," Odom says. "So they're willing to pay a little higher price." Schroeder adds that many 1031 Ex- change buyers are second- or third-genera- tion owners of apartments rotating out of the management-intensive properties and into more "hands-free" net lease real es- tate. As long as investment interest keeps cap rates compressed in the multifamily sector, he predicts, demand for net lease assets will stay strong. Similarly, retirees are also seeking net lease properties, whether they are 1031 Exchange investors getting out of hands- on properties or more conventional in- vestors frightened by stock market volatil- ity and low-yielding bonds, says Parker Carroll, a manag- ing director in the net lease investment group with Coldwell Banker Commercial in Austin, Texas. "Right now we're seeing a big trend of people preparing for retirement, and they're using net lease properties to replace bonds in their portfo- lios," Carroll explains. "We're seeing that on a bigger scale than we've probably ever seen before." Carroll's team be- gan marketing sev- en renovated Dairy Queen restaurants operated by a major franchisee in small Texas markets in February, and three were sold or under contract to sepa- rate investors within roughly a month. The buyers accepted cap rates of around 6 percent for the prop- erties, which feature 19 years left on the leases and annual rent increases of 1.5 per- cent. Each of the seven properties listed for around $1 million, and the remaining properties were generating high interest, he says. "We believe that's a pretty aggressive cap rate for those markets," Carroll says. "But I think the assets served as a price point where a lot of buyers could go in and buy for cash." Demand for net lease retail properties continues to outstrip available product, which should also keep downward pres- sure on cap rates. The supply of net lease retail assets for sale plunged 12.5 per- cent in the fourth quarter of 2015 from the third quarter, according to Boulder Group. It dropped an additional 1 per- cent in the first quarter of this year. Carroll Cram Blankstein Bialow takes you where you need to be. Our experienced team is skilled at tailoring a regional or national expansion plan that meets each retailer's individual needs. 781.444.2316 | bialow.com COPLEY SQUARE or UNION SQUARE

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