Investors ended the year with a surge of activity in the single-tenant net lease market. As a result, the fourth quarter was “the busiest in recent memory,” according to Chicago-based Boulder Group, a boutique investment real estate service firm specializing in net lease properties.
Low interest rates, greater financing availability and a large supply of properties available for disposition helped drive the surge in sales. In addition, investor appetite for high-quality assets led to a surge of deals on the best single-tenant net lease properties. Overall, Boulder estimates that the single tenant net lease market transaction volume in 2010 accounted for one in every three closed investment real estate sales.
Walgreens was the hottest acquisition target. Cap rates on deals involving the popular drugstore chain fell by 92 basis points during the course of the year, according to Boulder. And such deals could remain hot in 2011 as well, since there will be fewer Walgreens deals available, according to Encino, Calif-based Marcus & Millichap Real Estate Investment Services. Walgreens is planning on opening fewer than 250 stores in 2011 — half the number it opened in 2010.
Looking forward, both Boulder and Marcus & Millichap expect the market to stabilize in 2011. Investors will continue to pursue net lease properties — particularly high net worth individuals and well capitalized REITs. But cap rates will flatten after compressing in 2010.
Aside from the drugstore segment, dollar stores could be a popular play this year at higher cap rates than what other sectors command. According to Marcus & Millichap, dollar store cap rates currently average 9.1 percent. They shouldn't move much this year.
Fast-food restaurant deal flow accelerated 16 percent last year, according to Marcus & Millichap. “With buyers preferring fast-food chains, cap rates fell 20 basis points to 7.7 percent, though assets in tertiary areas or those leased to less creditworthy franchisees traded with initial yields above 8 percent,” according to the firm.
Lastly, after sales volume dropped nearly 20 percent in 2010 on convenience stores, that sector could see a bounceback in 2011. “Passage of a small business lending bill in late 2010 … could strengthen owner-user sales during the early part of this year,” according to Marcus & Millichap.
Median Asking Cap Rates by Property Type
| Property Type | Q3 2010 | Q4 2010 | Basis Point Change |
|---|---|---|---|
| Walgreens | 7.10% | 7.00 | -10 |
| Ground Leases | 6.70 | 6.90 | 20 |
| Restaurants | 8.00 | 7.76 | -24 |
| Leaseholds | 8.40 | 8.75 | 35 |
| Zero Cash Flows | 8.06 | 7.51 | -55 |
| Banks | 6.56 | 6.75 | 19 |
| CVS | 7.30 | 7.29 | -1 |
| Government-GSA | 8.35 | 8.00 | -35 |
| Dollar General | 8.65 | 8.51 | -14 |
| Fedex | 8.00 | 8.10 | 10 |
| McDonald's | 5.75 | 5.75 | 0 |
Sources: Marcus & Millichap, CoStar Group Inc., Boulder Group