Shopping Centers Today International

MAR 2016

Shopping Centers Today is the news magazine of the International Council of Shopping Centers (ICSC)

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they have no return threshold to hit, experts note. "Institutional investors need to get yield to their investors, usually around 6 percent," said Bill Rose, vice president and director of the national retail group at Calabasas, Calif.–based Marcus & Millichap. "So when a CVS goes on the market for a 5.75 percent cap rate, a REIT can't buy it, but that person who sold that apartment building and needs a 1031 exchange can." Cap rates for single-tenant net lease retail properties vary by tenant qual- ity, location and age of store, and it is here that rising interest rates could have an impact on valuations. Cap rates have been historically low, and the big debate is whether they have hit bottom. For the retail sector, cap rates remained unchanged at a national av- erage of 6.25 percent for the last two quarters of 2015, according to John Feeney, a vice president at Boulder Group. For top-tier assets with invest- ment-grade tenants, the cap rate is much lower. Boulder Group recently listed a Nashville, Tenn., Walgreens for sale at $7 million, with a 5.8 per- cent cap rate. For a four-year-old McDonald's or newer, the median asking cap rate is now 3.9 percent, while some bank buildings, such as Bank of America, get 4 percent, versus a Dollar General store of similar vintage, for which the median cap rate is 6.5 percent. Major categories for retail single- tenant net lease include pharmacies, restaurants, dollar stores, convenience stores, big boxes, auto-parts retailers and banks. Probably the most active, expanding single-tenant net lease cate- gories at the moment are quick-service eateries, dollar stores and auto-parts sellers, Feeney says. A Boulder Group survey of where cap rates are likely to be by the end of this year showed that the biggest group of respondents think cap rates will re- main unchanged, while the next largest group suggests that those will rise by 25 basis points. "Rising interest rates could affect the market from a devel- oper's perspective," said Rose. "Higher interest rates will raise cost of capital to build, which in turn will be passed on to the retailer, meaning rents could be slightly higher and the cost to buy the properties will be more expensive." A large portion of single-tenant net lease properties are bought with cash by 1031 buyers, and rising interest rates will not affect that type of trans- action, though they will affect lever- age transactions as the loan constant moves from the high 5 percentage to low 6 percentage levels. "To com- pensate, lenders will need to bring in spreads to maintain a constant," said Rose. "I see cap rates continuing to compress. Even if we see a net effect of an interest-rate rise, the lenders will bring in spreads to maintain deal flow. We are safe through 2016." Chris Czarnecki, president and CFO of Broadstone Real Estate, con- curs. "With rates increasing modestly and at a controlled pace, I don't see a lot of change in pricing expectations for the market. Obviously, if there was a dramatic move in rates, that's a dif- ferent story. For the past 12 months, cap rates have been flat. From our perspective, we are not modeling an increase in cap rates for 2016." But throw the supply-demand equation for single-tenant net lease 48 S C T / M a r c h 2 0 1 6 The market for single-tenant net lease properties this year will depend on interest rates and the demand from 1031 buyers.

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