Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)
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with the belief that this is a more risk- averse investment than other types of retail real estate. "While single-tenant, net-lease vol- ume declined in conjunction with the overall real estate market during the re- cession, the sector benefited in relation to other asset classes because investors, still concerned with volatility, like the fact that they have an annuity, steady- cash-flow-type of investment," said Guy Ponticiello, head of Jones Lang LaSalle's corporate finance and net lease team. "From the standpoint of risk spec- trum, core single-tenant, net-leased assets can definitely be a safe haven," said Christopher Roscoe, head of re- tail sector at New York City–based Clarion Partners. Investment in these properties has grown exponentially every year since 2008, Ponticiello says. "In 2011 volume totaled north of $30 billion," he said. "Probably about 50 percent to 60 per- cent of those were retail-oriented." On a square-foot basis, the total last year was flatter. "Total volume of [these] deals in 2011 was 5.3 million square feet, a bit lower than the 6 mil- lion square feet totaled in 2010," said Suzanne Mulvee, senior real estate strat- egist at CoStar Group. A number of book and electronics retailers have fallen, so no investment is a sure thing, of course. As with any- thing, investors need to be diligent in their review of such opportunities, Ros- coe cautions. He advises scrutinizing deals using what he calls the four Qs: quality of tenant, quality of lease, quality of space and quality of location. The weak spot seems to be judging the quality of the tenant, often referred to as the credit. "The market does a ter- rible job of differentiating at the credit level," said Mulvee. "We looked at cap rates of CVS and Rite Aid two years ago. At the time, the market was betting that Rite Aid would be bankrupt. Mean- while, the cap rates for what Rite Aid 42 SCT / APRIL 2012 and CVS were trading at were equal." In the U.K. there is strong interest in lot sizes priced below £3 million (about $4.7 million) for single-net retailers, of- ten bank buildings, says Eric Eastman, a "In the U.K. the interest comes from independent investors, not pension plans or insurance companies." London-based executive director at CB Richard Ellis. "The interest comes from independent investors, not pension plans or insurance companies," East- man said. "£3 million is the cutoff for high-net-worth investors." There is a second, very important part to the market. A number of invest- ment firms have put together specific funds, often in the form of a nontraded REIT, to acquire single-tenant, net-lease properties. According to Mulvee's re- search, the top five buyers of net-lease retail deals last year were Cole Real Estate Investments (with 1.5 million square feet), National Retail Properties (856,225 square feet), Realty Income Corp. (647,674 square feet), Store Capi- tal (431,837 square feet) and AAG Man- agement (133,695 square feet). Clarion, which manages a number of closed- and open-ended funds, plus separate accounts, in which the inves- tors are mostly domestic pension funds, is getting ready for investments within a new, nonlisted, private REIT for indi- vidual investors. Clarion's single-tenant, net-lease transactions complement its other investments in the retail sector, such as neighborhood/community shopping centers, big-box properties and malls, Roscoe says. Unfortunately, "coastal city core retail pricing has be- come extremely aggressive, dictating a low yield going in," Roscoe said. Single-tenant, net-lease deals have seen a lot of cap-rate compression, Pon- ticiello says. "Your average Walgreens will trade in the low 6 percent range," Ponticiello said. "If it's in a market like Southern California or Seattle, you will see those deals trade in the sub-6-per- cent range consistently." Other credit tenants can drive down cap rates even more. "McDonald's ground leases are unbelievable," said Rentz. "A year and a half ago, they were 5.5 percent cap rate, and now they are sub 5 percent. I just saw one yesterday that was 4 percent." In the U.K., cap rates for a good cor- ner location are heading toward the 6.5 percent mark, says Eastman. "In the big- ger cities, like Glasgow, Newcastle, Man- chester or Leeds, the lots still sell very well, but once you get outside the big metros, they are much harder to sell." As Rentz observes, investor inter- est has been as intense in his region as it has in primary markets. "Drugstores were trading at 7 percent to 8 percent cap rates at the start of 2011, then at 6 percent to 7 percent at the end of the year," said Rentz. "If you had dollar stores, they were at 8 and a quarter per- cent to 9 and a quarter percent one year ago, now they are 7 and a quarter per- cent to 8 and a half percent." U.K. cap rates move with the markets. "A good tenant in the right location with a long lease in Manchester would earn a 5 percent cap rate," said Eastman. Low yields have moved many inves- tors to migrate to secondary and tertiary markets, says Mulvee. "Since popula- tion and demographics in particular trade areas are what drive the value of single-tenant, net-lease real estate," Mulvee said, "you can do a deal in Des Moines as successfully as you can do a deal in Miami." SCT