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
www.REBusinessOnline.com Texas Real Estate Business • November 2015 • 43 "Overall, the price point and credit of these invest- ments, combined with continued low interest rates and ease of credit access, will keep a bid on this proper- ty type. That said, with a food of dol- lar stores coming to the market, we expect cap rates to remain fat for the foreseeable future." Moake sees cap rates continuing to compress for Family Dollar, with rates for Dollar General stabilizing or see- ing a slight uptick. He doesn't predict the recent Dollar Tree/Family Dollar merger to have a major impact on the net lease market. "Demand is going to remain strong in the dollar store sector overall," says Moake. "They are prime targets for 1031 exchange buyers and they are generally long-term leases." Buyers do need to be certain any property they are looking at will not be shuttered, he says. Walgreens, the nation's biggest pharmacy company, will close 200 stores in a cost-cutting move. Mean- while, Rite Aid appears to be ready to expand again now that its merger with Eckerd is no longer weighing on the bottom line, according to a net lease research report from Marcus & Millichap. Average cap rates on new construc- tion for Walgreens and CVS/Pharma- cy range from around 5 to 5.5 percent, while Rite Aid trades at frst-year re- turns from 6 percent to 6.5 percent. Walgreens' planned store closures are not a big concern for Moake. He says many of the afected stores likely are in underperforming areas and/or are making way for larger locations nearby. "Walgreens was opening 500 or 600 new stores a year at one point, which is about one new store every 17 hours," he says. "A lot of these clos- ings are strategic for positions that weren't quite as lucrative. If they're closing one store, they may be open- ing another in a new spot." Blankstein adds that drugstores were expanding so rapidly in recent years that they would sometimes leave underperforming stores open just to keep competitors from flling the space. Walgreens, which boasts more than 8,000 stores, is being oper- ated by a new ownership group led by 55-year-old Scotland native Alex Gourlay. Closing a limited amount of underperforming locations is part of the new group's strategy, but it isn't something Blankstein views as a ma- jor factor for net lease investors. The moves made by Walgreens are part of a $1.5 billion cost savings program that will take place over the next two years, according to Ficke. Rite Aid has also posted a strong performance re- cently, with its stock surging and new locations scheduled to open. The company also acquired Houston- based RediClinic, which operates 30 clinics in the Hous- ton, Austin and San Antonio areas, in 2014. "Rite Aid's stock has gone up al- most 900 percent in three years," says Moake. "They are in a huge upward climb." While acknowledging strides made by the company, Blankstein urges in- vestors to do their homework when considering Rite Aid. "The reality is they are still the third player in the space," he says. "A lot of yield investors are spending more time on Rite Aid. Clearly, there's a big spread diference, but they trade there for a reason. The risk profle is difer- ent. It has investors looking because of higher yields, but your fnancing will not be as good." Regarding quick-service restau- rants, average cap rates begin be- tween 4 and 5 percent for assets with full-term leases, unchanged from the prior annual period. McDonald's ground leases typically trade at frst- year returns close to 4 percent. "McDonald's has unbelievable credit," says Moake. "They've been around forever and they are the most established fast food operator. Cap rates for McDonald's locations are in the low 4s, or sometimes sub-4. Chick- fl-A is the only other quick service chain with a cap rate that low." Auto parts retailer AutoZone be- gins with cap rates in the mid 5 per- cent range, while Advance Auto Parts trades closer to 6 percent, with Pep Boys 50 basis points higher. Investment Strategies In spite of the low cap rates, private and 1031 exchange investors prefer retail because of familiarity with the tenants and a preference for the lower prices compared with ofce and in- dustrial properties. Net leases are also attractive due to the passive nature of the leases. At the same time, insti- tutional investors will generate most transactions above $15 million. Speck says the trend has been backed by an aging baby boomer pop- ulation transitioning to safer property types with less management-intensive operations, adding that there is also less development today compared to the last boom cycle between 2005 and 2007. "Rising transactions indicate an abundance of capital fowing into this segment, which is apparent just by the sheer number of buyers and sellers," says Speck. "It is indicative of a very healthy market. Underwriting re- mains conservative as well, removing many of the pitfalls associated with the last downturn." Not surprisingly, The Boulder Group concludes in its third-quarter 2015 report that the net lease market should remain active through at least the end of the year. Net lease trans- actions will likely surpass last year's historic levels, according to the frm. Blankstein expects the record veloc- ity to continue at least into the early part of next year, attributing the bull run to low interest rates, a limited amount of new construction and a high ratio of buyers to attractive prop- erties. "As real estate volume heats up, net lease is a benefactor," says Blank- stein. n www.stanjohnsonco.com $20 Billion Over $20 Billion Net Lease Transactions 8 Cities Largest Team of Net Lease Brokers 30 Years Over 30 Years of Experience 10333 Richmond Ave. | Suite 740 Houston, TX 77042 (832) 476-3440 For over 30 years, Stan Johnson Company has focused exclusively on the sale of net lease properties nationwide. Our frm's collective expertise, teamwork, track record and net lease specialization has earned our company the reputation of the Net Lease Authority® and enables us to consistently and efciently maximize sales proceeds for our sellers in any market condition. November 4-6, 2015 | Dallas, TX Meet us at ICSC Texas Todd Moore Associate Director Marc Peeler Associate Our net lease experts in attendance: Jim Gibson THE NET Regional Director Geoff Ficke Marcus & Millichap Dollar stores, such as this Dollar General location in Abilene, are averaging cap rates in the low 6 percent range. Dollar Tree frst-year returns are 75 basis points higher. Tim Speck Marcus & Millichap