By Mark Hershmeyer | CoStar Group

Net Lease Baby Boomers

Since bottoming five years ago this quarter, the average per square foot price being paid for single-tenant net leased retail properties has now surpassed their pre-recession highs of 2007. The average price increased to about $263 per square foot in the past quarter, up from its low of about $175, according to CoStar Group sales data.


And the dollar volume of deals completed last year surpassed $25 billion, which is $7 billion more than in 2013. It was the third consecutive year that volume has topped the previous high, according to CoStar data.


By many indications, the pace of deal volume and pricing increases could continue.


Randy Blankstein, president of The Boulder Group, a Chicago-area based boutique investment real estate service firm specializing in single tenant net lease properties, said the strength of the multifamily market has much to do with the demand.


“As apartment owners take advantage of record pricing in the multifamily sector, new net lease investors have emerged. Retirees looking to leave the management intensive nature of multifamily have become increasingly more active in the net lease sector due to the passive nature of these investments,” said Blankstein in his quarterly net lease report.


Multifamily sellers are taking advantage of federal 1031 tax-free exchanges, according to both Boulder and Marcus & Millichap analysis.


Investors executing 1031-exchanges will dominate the net-leased market in 2015 as retiring baby boomers take advantage of record-low cap rates in the apartment market.


“Existing owners on the brink of retirement or considering divesting within the next three years are moving forward with plans while interest rates are low. The proceeds from these deals are put into net-leased assets to provide steady cash flow without management responsibilities,” Marcus & Millichap noted in its latest quarterly net lease report.


“Properties secured under long leases with national credit tenants are highly sought after,” Marcus & Millichap noted. “These opportunities should expand this year as the pace of retail construction accelerates, creating more pad sites. Dollar stores and fast-food restaurants dominate the field of expanding retailers in 2015, providing investors several options to reallocate capital.”


Average Prices

Over the last five quarters, restaurant and fast-food properties made up the highest percentages of net lease property sales recorded by CoStar. The two segments accounted for 24% of deals.


Fast-food eateries were commanding about $635 per square foot, up from $565 per square foot in the third quarter of last year. Casual serve restaurants have averaged about $377 per square foot over the last two quarters.


Drug store properties made up the next largest segment of net leased retail sales at about 8% of activity. Drug store prices have been bouncing between $360 and $380 per square foot over the last five quarters.


Service stations and convenience stores accounted for about 7.5% of such sales over the last five quarters. Service stations have been trading in a wide range quarter to quarter between $610 and $810 per square foot. Prices over the period have averaged $700 per square foot.


Convenience store prices have also traded in a wide range of between $525 and $650 per square foot. The average price over the last five quarters has come in at $570 per square foot.


Cap Rate Compression

The increasing pool of capital from first-time net lease investors has created strong competition amongst buyers for net lease assets leading to historically low cap rates.


At the end of the first quarter, single-tenant retail cap rates hit a new low of a little less than 6.3%. Several specific type property types came in significantly lower than that: banks, 5.6%; and convenience stores and service stations, 5.5%. Coming in significantly higher were auto dealerships and day care centers at about 8%.


Looking through the rest of the year Boulder’s Blankstein said net lease investors will be carefully monitoring the capital markets for potential rises in interest rates and subsequent softening in asset pricing.


“Sellers will continue to aggressively price assets in an attempt to achieve favorable cap rates in sale transactions; however the expectation is that cap rates should remain relatively stable in upcoming quarters,” Blankstein added.