Single-Tenant Net-Lease Update: Retail Is in High Demand

Wednesday, February 20, 2019

Real Estate Indicators from Managing Director Marc Mandel and Director Steve Schrenk, who lead HFF's triple-net-lease (NNN) team in HFF's Philadelphia office. For a listing of current NNN properties available for sale, please click here.

The net-lease retail market has become very segmented over the past year. While overall cap rates may have increased slightly over the past 12 to 18 months, certain property types have remained in high demand. These property types are not limited to, but include:

  • Gas and Convenience Stores
  • Grocery Stores
  • Quick-Service Restaurants (QSR)
  • Medical-Related Tenants

While these certainly aren’t the only net-lease deals that have been in high demand, they have been some of the most highly sought-after in today’s market.

Traditionally, pricing movement and overall deal volume in the single-tenant market tends to lag the other major property types (multi-family, office and multi-tenant retail). While transaction volumes may fluctuate heavily in these product types, a strong flow of capital has remained to pour into the net-lease space, especially through 1031 exchanges. There are a variety of reasons this influx of capital continues, most specifically the fact that net-lease properties offer limited owner responsibilities, long-term leases, strong credit and attractive rental increases.

Most recently, there has been a strong push for shopping center owners to unlock hidden value by the monetization of outparcels. This is possible by subdividing outparcels on existing shopping centers, which tend to be net lease and trade at a premium. Additionally, this can take place by the creation of signing new outparcels leases in larger parking lots where parking ratios are still compliant with existing tenant leases and municipal codes. This has also been taking place on mall redevelopment sites and has become a major component in both office and multi-family development/redevelopment space. 

One of the specific property types within net lease that has seen incredible demand is gas and convenience stores. These properties are appealing to many as they typically offer strong corner locations, large parcel sizes and an “Amazon/internet” proof type of business. This holds true with other property types such as coffee, quick-service restaurants and medical users, all of which offer a hedge on the internet business.

Net-lease grocery stores are another category that are in high demand. We have had recent success trading a couple of single-tenant Safeway properties over the past few months and were thrilled with the high level of activity for these assets. Additionally, we are presently marketing a short-term, net-lease Kroger, on which we have received multiple offers from opportunistic/value add buyers who are chasing yield while feeling confident in this market segment.

As always, the gold standard and most demanded segment of the net-lease space remains to be low-priced, single-tenant QSRs. These restaurants continue to be in high demand whether they offer a short-term lease at market or below market rent or a longer-term lease with more than 10 years of term. With an average price point of between $2 million to $3 million, it seems a strong market will always exist for these deals as there are many buyers in this price range. The buyer pool runs the gamut from high-net-worth individuals, private and public REITS, institutions and various 1031 clients looking to place money or fill their 1031 exchange needs.

Lastly, we have been tracking the trend in the pharmacy sector – specifically CVS, Walgreens and Rite-Aid – closely over the past several months. In July 2018, we found 450 pharmacies on market. We completed the same study prior to the completion of this articles and found over 550 single-tenant pharmacies on the market. Interestingly, the average asking cap rate for these properties fell 18 BPS from 6.48 to 6.3 percent; however these properties are averaging more than 180 days on market and counting. The increase in inventory is a result of a few reasons. Prior to the completion of the Walgreens/Rite-Aid acquisition, investors were hesitant to purchase and sell due to the uncertainty of what they would eventually own. Also, build-to-suit development in the pharmacy space brings higher rents, typically limited rent growth and unreplaceable rent should the tenant ever vacate. Additionally, Walgreens took on an increased level of debt with the acquisition of 1,932 Rite Aid stores, and the uncertainty of store closures proved to be a detriment. Meanwhile, during this same period, CVS took advantage of the situation and extended many of their leases while reducing their rent obligations. The uncertainty continues to mount within the pharmacy space with continued pressure from Amazon and other internet retailers who are taking market share and have spent significant amounts of capital to compete in this space. Investors have become more focused on buying properties at market rents with rental increases in well-located areas, all of which have become increasingly important. Nonetheless, these assets offer long-term leases from investment grade, credit tenants so there will remain to be interest. 

Representative Closed NNN Transactions

Wawa in Gilbertsville
  • Wawa:  HFF sold an apartment building for a local Philadelphia owner and then successfully executed a 1031 exchange in which the owner purchased a local, net-leased Wawa in Gilbertsville, Pennsylvania. Both the Philadelphia multi-housing and NNN teams worked on the transaction. For more information, please click here.
  • Citizens Bank:  HFF brokered the sale of a Philadelphia MSA bank to a 1031 private investor based in California. This transaction demonstrates the NNN team's national reach and the wide audience that exists for strong national credit tenants. More information can be found here.
  • CVS:  HFF brokered the sale of a CVS in Allentown, Pennsylvania, to a New Jersey-based 1031 buyer, which was sourced through our marketing campaign. For more information on this transaction, click here.
  • McDonald’s:  The team assisted in the sale of an off-market, short-term, McDonald’s asset in the Midwest. The listing produced a half dozen offers in less than 24 hours due to the scarcity of a value-add McDonald’s opportunity.
QuestCare Medical Clinic
  • QuestCare Medical Clinic:  This property, which is in the Dallas-area community of Arlington, Texas, sold to a 1031 buyer out of California, which HFF teams in both Philadelphia and Dallas procured, again showing the team's ability to pull from buyers all over the country for well-located, net-lease assets regardless of the state or region. Click here for more information on the transaction.
  • Walmart:  This was an off-market transaction, which we manufactured with the assistance of the HFF network. By utilizing key relationships within the company, a team comprising triple-net-lease experts in Philadelphia and New York City were able to match the buyer and seller together seamlessly. This was a unique sale in that the it was a portion of the Walmart building which was sold in the Pittsburgh MSA.
  • Safeway:  This was an HFF listing in which HFF procured the buyer. The property, which is in Arnold, Maryland, was sold to a 1031 investor out of Texas. It was a very efficient sale process in going from deal launch to close in just under two months. Both HFF's Philadelphia and Dallas office worked closely on this transaction.
  • 7-Eleven:  The HFF team was able to achieve aggressive pricing on this all-cash sale from a New York-based 1031 buyer. A team comprising retail experts from Philadelphia and New Jersey worked with a co-broker on this transaction, maximizing price by bringing the best buyer to the table. The property is in Elizabeth, New Jersey.
  • Tesla:  The HFF triple-net-lease team represented a buyer on this transaction. This deal came together during an ICSC conference. Once the team understood the buyer’s needs, they were able to execute by providing them an appropriate deal that fit their acquisition criteria. HFF retail experts from Philadelphia and Florida closed the deal, and the property is located in Wexford, Pennsylvania. 

About HFF's Net Lease Investment Advisory Team

HFF’s net-lease professionals focus solely on the single-tenant, net-lease real estate market in order to bring the highest-quality knowledge, market data and execution to this specialized industry. No other firm provides the unique blend of capital markets information, real time data-tracking and in-depth research and support as HFF. Additionally, HFF’s unique brand brings with it a level of professionalism and sophistication that distinguishes itself from the deeply fragmented brokers and intermediaries currently active in the net lease space.

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