44 REAL ESTATE FORUM MAY 2018 www.globest.com/realestateforum
TAX REFORM CREATES NEW DYNAMICS
FOR SINGLE-TENANT NET LEASE
Investors seeking relatively low-maintenance management assets
and steady yields can find opportunity in single tenant net-leased
retail properties, which remain a viable option, particularly for those
trading out of more management intensive assets. An important consideration is the new tax law and how it affects the availability of
single-tenant net leased properties. Restrictions on business interest
deductions under the new tax law make sale-leaseback options
attractive for retailers, although longer hold periods for developers
under the law’s carried interest provisions could moderate new location development. Another consideration: The newly created 20%
pass-through deduction, which could boost after-tax yields on real
estate investments, making net-lease assets an attractive option for
those investors who prefer a more hands-off management approach.
RISING INTEREST RATE CLIMATE COULD
PRESSURE NET-LEASE PROPERTY YIELDS
Long-term interest rates rose significantly over the
last two years, compressing the yield spread
between interest rates and cap rates that net-leased
retail assets offer. This trend, in conjunction with
uncertainty surrounding fiscal, tax and monetary
policy, restrained single-tenant net lease transactions, but activity levels appear to be reviving as
policy clarity emerges. Cap rates largely held firm
since 2016, but a modest uptick in yield has begun
to form. If long-term interest rates surge higher, a
widening expectation gap between buyers and sellers could temporarily slow activity but considering
that single-tenant net lease cap rates are well below
their long-term average, it’s unlikely that the yield
spread would compress substantively.
FUNDAMENTALS REMAIN HEALTHY
While many headlines focus on the bankruptcy of numerous high-profile retail stores,
the retail sector has made steady gains following The Great Recession. Vacancy rates at
retail centers have tightened considerably
since the recession, declining to their lowest
level in over 17 years. A key factor has been
the limited construction during this cycle,
with average annual additions at just one-third of pre-recession construction levels. The
tighter retail climate has supported steady rent
gains, pushing the average retail rental rate
per foot to its highest level on record as of
year-end 2017.
Analysis and commentary for this feature was provided by Marcus & Millichap’s national director of retail, Scott Holmes, and
Marcus & Millichap Research Services. Additional information collected from Accenture, CoStar Group, Deloitte, Gensler,
National Retail Federation, One Click Retail, Real Capital Analytics and the US Census Bureau.
A broader version of the Retail Field Guide will be available at ICSC RECON 2018 in Las Vegas. Marcus & Millichap will present
its complete Retail Trends 2018: Field Guide designed to help retail investors and owners overcome the frenzy of, and seize
opportunities in, the market. The firm will engage with a panel of industry experts to identify risks and implement forward-looking strategies, taking investors from surviving to thriving in the ever-evolving retail climate.
$15
$16
$17
$18
$19
$20
4%
5%
6%
7%
8%
VACANCY RATE AVERAGE ASKING RENT
2018* 2016 2014 2012 2010 2008 2006 2004 2002 2000
* FORECAST
SOURCES: MARCUS & MILLICHAP RESEARCH SERVICES, COSTAR GROUP, INC.
US RETAIL RENT & VACANCY TRENDS
