“Cap rates for dollar stores have probably
come down the most aggressively of any net-leased asset out there,” notes Hipp. “It’s a
bite-sized deal that’s investment quality, and
people seem to like that model and market,
which is delivering goods and services at a
value price.” It’s not uncommon for a Dollar
General to trade in the 7.5% cap rate range,
whereas a year-and-a-half ago, caps were
around 8.75%, he relates.
A number of other factors are behind
investor interest for dollar stores. For one,
these deals are typically in the $1-million-to-
$1.5-million range. And this summer,
Moody’s and Standard and Poor’s both
upgraded Dollar General’s credit to investment-grade. Hipp also sees demand for
convenience store operator Wawa Inc. and
“main street retail” tenants like Chick-fil-A.
Demand is less strong for “private credits
in second and third-tier markets,”
Blankstein finds. This would include tenants such as franchised restaurants or convenience store operators in markets such as
Rockford, IL or Dayton, OH.
With so much capital chasing the top-
quality deals, what’s a would-be buyer to do?
Hipp advises that assets in tertiary markets
with long-term net leases are now worth
looking into, given the higher yields on
those assets compared to the aggressive cap
rates on the most sought-after assets.
Safe Harbor in Uncertain Times
W.P. Carey was one of the
many net lease-focused
firms who shared their
thoughts on the sector at
last month’s RealShare Net
Lease West conference in
Los Angeles. Retail in particular is making quite a
resurgence. More than 200
attended the event (right),
which featured experts
speaking on topics ranging
from capital availability to
competition for product.
Some of most recognized players in the field gave their thoughts on the presidential
race (below, left), while attendees used the time between panels to network and catch
up with colleagues (below, right).
For information on RealShare events, go to www.realshareconferences.com.
terms that protect a lender’s and landlord’s
position in the asset,” Volk finds.
Much of the financing for net-lease retail
comes from local and regional banks, with
activity from insurance firms and CMBS
sources as well. “Every lender has a bucket
for net lease, but the market has heated up
for insurance and balance sheet lenders like
Wells Fargo,” according to Hipp.
While CMBS financing is more available
for net-lease retail properties now than it
was two years ago, it’s nowhere near the
levels that were available before the financial crisis. “The problem,” notes Blankstein,
“is that the majority of the transactions
being done today are not in construction,
which they were historically. Today it’s more
vintage and secondary properties for sale,
which are more difficult to get done on a
CMBS basis.” He expects CMBS financing
to be more active in this niche as construction activity picks up.
With the supply pipeline remaining constricted, Blankstein doesn’t expect investor
demand to slack off “until something fundamental changes in the economy or the
development pipeline.” He doesn’t see that
happening until 2014 or later.
There are other favorable signs. As the
single-family sector improves and consumers
feel more optimistic, they’re more likely to
open their wallets. This consumer spending
will likely provide a boost to retail properties
and translate into more net-lease activity.
However, economic recovery also means
that this niche will have to compete for
investor attention with other growth-ori-ented sectors. Given that net-lease retail is
more of a conservative and defensive play,
is investor interest likely to hold up as the
Not according to Blankstein, who says
the asset class “won’t be as popular when
things improve and people want to take
more lease-up and speculative risk.” He
believes that as the economy improves,
demand for tenants such as Walgreens and
CVS will remain constant, while upscale
restaurant and furniture store tenants are
more likely to benefit from a boost, both in
consumer spending and investor interest.
As for the dollar stores, demand is likely
to hold up, depending on where. “They
don’t typically do Dollar Generals in Tysons
Square, VA,” says Hipp. “The markets that
they’re going into may not have a Walmart
or a big-box retailer, so it might be one of the
main contributors to shopping in that market. At the end of the day, people like value,
and dollar stores will always corner some
piece of the business.” ◆