Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.
Issue link: https://texasrealestatebusiness.epubxp.com/i/591312
42 • November 2015 • Texas Real Estate Business www.REBusinessOnline.com N et lease properties remain pop- ular among investors in Texas and across the country, with the volume of deals showing no signs of slowing. Nationally, cap rates in the third quarter of 2015 for the single-tenant net lease retail and ofce sectors reached new historic lows of 6.25 percent and 7.25 percent respectively, according to The Boulder Group, a Northbrook, Ill.-based net lease bro- kerage frm. "We're seeing a lot of companies that are pressured to monetize their real estate," says Randy Blankstein, founder and president of The Boul- der Group. "We've sold 60 properties on behalf of Darden Restaurants this year. Lifetime Fitness has sold a few properties, McDonald's is evaluating the net lease concept. Many compa- nies are looking at dividing their real estate from the operating company." An attractive feature with net lease properties is that the landowner does not have to perform any maintenance on the property in order to collect a check. For these and other reasons, it is currently a seller's market. "The bottom line is demand has in- creased," says Matt Moake, an acqui- sition and disposi- tion specialist with HighStreet Net Lease Group. "A lot of investors have fooded the net lease arena. There's also a familiar- ity factor because these are tenants you see and shop at every day." According to Marcus & Millic- hap, a seven-year freeze on the federal funds rate has shifted buyers' expec- tations for yield and is a major factor in cap rates sinking to an all-time low. "Taken together, the openings and closings of single-tenant users are a refection of a market that is searching for equilibrium after rapid growth in recent years," according to the frm's latest net lease research report. "As pad sites on large projects are de- veloped, the pace of growth from single-tenant retailers will be more disciplined in the coming year, but ex- pansion will persist overall." At times it can be difcult for inves- tors to fnd a great deal due to the high demand, according to Moake. "Cap rates have continued to com- press, so it's a challenge to fnd the return target that a lot of people are looking for without overpaying," says Moake. "We've seen some investors willing to take a little more risk and look for a slightly lower investment- grade tenant in exchange for a strong location." As with all real estate, location plays a major factor in net lease deals. Even when a tenant has only a short net lease term or less than stellar credit, the seller may know they have a strong location that can be redeveloped or re- positioned with a new lease, in which case the cap rate could still land in the 5 or 6 percent range. After two quar- ters of cap rate stability, cap rates for net lease retail properties nationally declined by 15 basis points in the third quarter of this year, the largest decline since the second quarter of 2014, ac- cording to The Boulder Group. Blankstein says 1031 exchange buy- ers and private investors now com- mand about 70 percent of the net lease market share for properties that cost less than $15 million. From 2010 to 2013, there was a big shift away from institutional buyers toward private investors, he says. Much of the new demand from private investors is be- cause of the passive nature of the in- vestment. Strong Markets Moake, whose company is based in Houston, says low oil prices that are hurting the energy industry shouldn't negatively impact the local net lease sector as long as the city and metro area keep adding popu- lation at a rapid rate. In Texas, the market for net lease investment sales is even hotter be- cause so many out- of-state investors are looking to do business. Austin is also growing rap- idly and is proving to be a hot com- modity for both local and out-of-state investors. "Austin is kind of the prettiest girl at the dance right now," says Moake. "California investors are especially hungry to enter the Austin market, which has continued to help drive cap rates down." Investors also continue to fock to Dallas, according to Geof Ficke, vice president of Marcus & Millichap's Dallas ofce, because of the metro's exceptional job growth and a number of high-profle corporate relocations. "Investors see a growing area (like the major Texas metros), which trans- lates to a generally lower risk pro- fle for retaining your tenants," says Ficke. "Investors have stayed interest- ed in net lease assets due to portfolio simplifcation." Blankstein expects Texas to perform particularly well because of tax ad- vantages compared with other states and the Lone Star State's rapid pop- ulation growth. While all net lease property types are popular in Texas, properties in the highest demand are new construction with long-term leas- es to investment-grade tenants. Property Types In the dollar store sector, the merger between Family Dollar and Dollar Tree will require divesting 340 stores, according to the Federal Trade Com- mission. Most of the divested stores are expected to be Family Dollar loca- tions. Meanwhile, Dollar General will expand by more than 700 locations this year and by a similar amount in 2016. Cap rates for discounters com- pressed 60 basis points in the most re- cent 12-month period. Family Dollar and Dollar General stores with new leases average in the low 6 percent rage, while Dollar Tree frst-year re- turns are 75 basis points higher. "At Marcus & Millichap, we have seen a 220 percent increase in the number of discount store transactions since 2010," says Tim Speck, regional manager of the frm's Dallas ofce. NO SLOWING NET LEASE SECTOR IN TEXAS Investors bullish on net lease properties in spite of record low cap rates. By Haisten Willis Matt Moake HighStreet Net Lease Group Dan Frey - 512.682.5507 Michele Gary - 512.682.5593 Adam Zimel - 512.682.5548 OPENING FALL 2017! Freedom Crossing at Fort Bliss FREEDOM CROSSING AT FORT BRAGG In†roducing Visit freedomcrossingatftbragg.com F A Y E T T E V I L L E , N C First dine-in movie theater in the Fayetteville market Restaurant spaces with abundant outdoor seating wrapping a lush village square common area Outdoor complex that will serve as Fort Bragg's new town center Access to more than 263,000 active & retired military personnel/families Second project in the Freedom Crossing portfolio - following Fort Bliss Visit us at Texas ICSC - Booth #519 Randy Blankstein The Boulder Group