Cassidy Turley is pleased to announce the release of our Fall 2012 National Single-Tenant Investment Report. This report covers investment activity within the commercial real estate market as it pertains to single-tenant net leased properties like drug stores, fast food and automotive retail locations, single-tenant industrial properties and the gamut of big-box retail properties, ranging from small (junior boxes) to large (mega-boxes).
Among the findings in our latest report;
- Following a robust start in which deal activity had been reaching pre-recession levels, sales activity has been slowing over the final half of 2012. The cause of this slowdown has been a lack of available properties on the market.
- Demand levels continue to increase thanks to the relative security of net leased buildings, but demand directly reflects both the credit-worthiness of the tenants in place, as well as the length of lease term. McDonald’s tops our list in terms of investor demand, followed by CVS and Walgreen’s. This is because all of these players prefer long-term leases of 20 years or more and all are considered relatively recession proof and risk-free in terms of credit.
- Pricing is increasing for nearly every net lease investment type, with the exception of big box retail. Within that segment of the marketplace, junior boxes (20,000 to 40,000 square feet in size) are holding their own, but consolidation among retailers who use mid-boxes (40,000 to 80,000 square feet) and mega-boxes (80,000 square feet or more) is negatively impacting investor demand for these properties. With demand for larger boxes low (and many of the retailers who do use this format preferring to build new properties instead of backfilling existing vacant storefronts), retail big boxes are viewed as the highest risk portion of the net lease marketplace—a sector of the commercial real estate investment market that traditionally has been about low risk.
- The average capitalization rate (a measure of return on investment) on drug store deals is currently 6.8%. One year ago, this metric stood at 7.3%. It has consistently moved downward since the fourth quarter of 2009 when it peaked at 8.1%. Because demand for this property type remains high and risk viewed as low, cap rates have continued to compress.
- The average capitalization rate for fast food transactions is currently 7.1%, the same level where it has stood for the past six months. The lowest cap rates that we have tracked this year have been as low as the high 4.0% range and have included tenants like McDonald’s, Chick-fil-A, Starbucks deals. Most sub-6% cap rate deals continue to be in superior urban or suburban locations with long-term leases in place, usually to corporate ownership, though there were some strong local franchise operations also represented. The higher cap rates that we have tracked (9.0% or more) have typically reflected either less quality physical locations or older structures or have usually included franchise ownership with riskier credit scores or shorter term leases in place.
- The average price on the single-tenant automotive deals that closed during the third quarter was $117 per square foot. This compares to an average of $119 per square foot during the second quarter and $108 per square foot during the first quarter of 2012. In general, we are seeing gradual price increases across the board. Urban properties with long-term leases in place to solid national credit tenants are seeing the strongest increases.
- The average capitalization rate on automotive retail sales is currently 6.6%,down from 8.1% just three months ago. With fewer distress sales taking place, pricing is heading up and cap rates are falling quickly.
- While junior box locations continue to demonstrate the solid leasing fundamentals of strong tenant demand, falling vacancy levels and improving rental rate growth for Class A and Class B product, the rest of the big box retail marketplace continues to struggle with serious issues. Class C product of all sizes continue to struggle with low demand, high vacancy and downward pressure on rental rates. Meanwhile, grocery store consolidation will weigh on mid-box fundamentals in 2013 while mega-boxes will continue to struggle with a shrinking pool of tenants. While there will be a few opportunistic retailers seizing upon this environment to lock in discounted lease rates, overall fundamentals will erode and this will result in continued declines in investor demand.
- Industrial fundamentals are showing marked improvement nationally, with 46 of the 67 major U.S. industrial markets that Cassidy Turley tracks reporting growth. These factors have helped to boost pricing and lower cap rates to today’s average of 6.9% (down from 7.4% six months ago). Improving vacancy and rental rate growth will help to contribute to an overall rise in investment pricing and generalized cap rate compression over the next year.
The full report is attached, or you can find it on our website at: