IRVINE, CA—The single tenant net lease sector has come under pressure in recent years, chief among them the looming possibility of another interest rate hike. But what has that done to the sector, and is that the most important thing weighing on it? Maybe not, says Joe Chichester, director at Faris Lee Investments. GlobeSt.com met with him, managing director Tom Chichester and director Matt Brooks to get a look at what is moving the sector, where it’s going and who’s buying in this EXCLUSIVE interview for the RECon 2017 show.
GlobeSt.com: What does the STNL market look like today and how is it different from 18 months ago?
Joe Chichester: A major difference is the dislocation between buyers and sellers in regards to pricing expectation, which is partly due to the supply and demand curve shifting in this segment of real estate. Eighteen months ago the demand for STNL assets outweighed the supply. That has now shifted and supply has surpassed the demand. For example, there are more than 200 STNL drug stores currently available for sale nationwide, which is a significant increase from 18 months ago. On a macro level, this oversupply affects the overall competitive nature of a property, as buyers have more options to choose from, which in return has begun to limit the amount of offers per property. Additionally, the economy has shifted with interest rates going from a low 4% range to a high 4% range, which directly affects and correlates to the overall cap rate that a buyer is willing to pay for a property. As the economy shifts, it is crucial that sellers work with strategic brokers who understand how to qualify and select a buyer, work hand-in-hand with a mortgage broker/lender, and navigate through all the other hurdles of a deal in order to close escrow successfully.
GlobeSt.com: How to you advise sellers and execute a marketing strategy?
Tom Chichester: We are advising sellers to take a few chips off the table. We are still in a relatively strong market and we are telling them it might be time to sell their B and C locations. We are seeing bigger box store closures as victims of the Amazon effect such as Sports Authority, JCPenney, and Macy’s. With a STNL property you are either 100% occupied or 100% vacant – there is no in between – since cap rates are still low, it may be beneficial to sell now and exchange into a multi-tenant strip center, limiting some exposure.
To effectively execute a marketing strategy in today’s environment regardless of the retail property category we really stress the importance of engaging with a capital markets expert prior to selling. This is just as important as qualifying the actual buyer because of the shifting interest rates and finance market today. Lenders are just as much of the purchase process as the buyer, and if a deal can’t be financed, there is no transaction.
GlobeSt.com: What does the STNL buyer profile look like?
Matt Brooks: In the current market, the most consistent buyer of STNL retail properties has been the private investor; specifically 1031 buyers transitioning from multi-family properties to STNL retail assets for ease of management. The buyers are looking for certainty, which equates to primary markets with credit tenants and long-term leases. Buyers are largely unfazed by the compressed cap rates in these markets because of the low yield environment in the multi-family space. The delta between buyers and sellers in A locations is much narrower than in corresponding B and C locations where there’s a large discrepancy in expectations. We find that our clients still view commercial real estate as a primary option in allocating their capital within their investment portfolio due to the inflated pricing within the equity and bond markets.
Visit Faris Lee Investments at ICSC RECON in Las Vegas at Booth C150M. www.farislee.com