Single-tenant, net leased (STNL) retail properties continue to be among the most highly sought-after real estate investments. This is particularly true in Colorado and California where supply and demand constraints have created sales with significant premiums.
Zach Wright, Pinnacle Real Estate Advisors.
Investors are accustomed to paying low cap rates for single-tenant assets within California as these properties have historically traded for a significant premium in comparison to the rest of the nation. However, the premium associated with Colorado STNL retail properties is a fairly new phenomenon.
This Colorado premium can be attributed to a considerable supply and demand imbalance. There are very few available STNL properties within Colorado, and substantial capital actively chases this product type.
California-based 1031 exchange investors seeking higher yields and Colorado-based 1031 exchange investors selling multifamily properties at historic pricing (due to significant appreciation in rents and historically low cap rates) are spurring the increased demand.
Colorado’s strong economy and recent population growth has also led to a lot of new development. This has impacted the quality of available properties, many of which are new construction with long-term leases.
The median sold cap rate for a STNL retail property in Colorado was 6.02 percent in 2017. This represented a 38 basis point premium in comparison to the USA (excluding Colorado and California properties). The same product type in California traded for a 105 basis point premium in comparison to the USA (excluding California and Colorado properties).
Over the past five years, the Colorado premium has continued to expand. From 2013 to 2017, the year-by-year basis point premium for Colorado properties (in comparison to the USA) was 26, 0, 20, 31 and 38, respectively. During this same period, the premium associated with California properties has slightly contracted with a year-by-year premium of 130, 120, 110, 115 and 105, respectively.
The supply of newly constructed, long-term leased properties will likely remain robust as retailers continue to expand in Colorado to meet the needs of a growing population. This supply of high-quality STNL assets will continue to be a driving force behind the Colorado premium.
With a vast pool of buyers targeting assets in Colorado, the demand is expected to significantly outweigh the supply and even further contribute to a continued widening of the premium for Colorado STNL retail assets.
— By Zach Wright, advisor, Pinnacle Real Estate Advisors. This article first appeared in the May 2018 issue of Western Real Estate Business magazine.