Single-tenant retail sales volume remains incredibly strong, totaling more than $9.4 billion in transactions through the first half of 2015. At this rate, the sector will have no problem significantly outpacing the $15.24 billion reported last year, according to Stan Johnson’s Net Lease Outlook, which tracks the U.S. single-tenant retail market. According to the report, transaction volume was the highest in the West and Northeast, where sales for the first half of 2015 have already exceeded $2 billion in each region. The Stan Johnson report only tracks significant investment sales (assets priced at $2.5 million or greater).
Retail cap rates have been trending downward for several years across the nation, but the greatest compression has occurred in the West. Average cap rates in the West currently are the lowest of all regions at 5.54 percent, representing a 1.24 percentage point drop in the last three-and-a-half years. Overall, single-tenant retail cap rates are fairly consistent across all regions, with the spread being less than one percentage point.
Sales prices per square foot vary more widely from region to region. While most areas of the country are at or near the national average of $264 per square foot, the Northeast has seen average values soar in recent quarters. At mid-year 2015, the Northeast reported an average price per square foot of $663.
Single-tenant retail construction levels have been tapering off over the last few quarters. Since reporting a recent high of more than 26.7 million square feet in second-quarter 2014, the sector reported just shy of 15.5 million square feet under construction at mid-year 2015. Delivery amounts have been robust, but new starts have slowed. Future development trends show the Southeast as the most active region for new retail development, as the area reported more than 4.6 million square feet under construction at mid-year. The Midwest, too, with more than 3.2 million square feet under construction, will continue to be a region to watch, despite development levels being down.
Retail transactions in the last six months have spanned all property subtypes, from quick-serve restaurants and drug stores to discount retailers and grocery stores. Available properties also vary greatly across the retail subtypes. Currently, there are more than 1,500 active listings for quick-serve restaurants across the nation, with most available locations in the Midwest and across the Southeast. National retailers including Burger King, Wendy’s and KFC remain popular, while regional tenants such as Jack In The Box and Krystal also have multiple locations available for sale. Drug stores, too, represent a bulk of on-market properties, with more than 450 actively marketed listings. Walgreens, Rite Aid and CVS are the dominant brands for single offerings, as well as the larger price tag portfolio offerings.
Discount retailers, including Dollar General, represent another buying opportunity, with more than 500 active listings. The Southeast and Midwest are the predominant locations, with Florida, Georgia, Louisiana, North Carolina and Ohio boasting some of the highest counts. Grocery stores, from specialty supermarkets to discount grocers, contribute another 130 available properties with a less concentrated geographic spread, although California remains a leading market.
GDP, Consumer Confidence on the Rise
At mid-year 2015, the U.S. economy was continuing to show signs of growth and stability. According to revised estimates, gross domestic product (GDP) increased 3.7 percent during the second quarter, and personal income growth was reported at 0.4 percent for the month of June. Despite a sharp dip in July, consumer confidence rebounded in August as consumers now feel more optimistic about current conditions. Real estate markets across the nation have been reporting declining vacancy rates, increased absorption and consistent rental rate appreciation. In the net lease sector, the market has seen cap rates across all property types fall to historic lows, and indications point to cap rates remaining low for the foreseeable future.
Potential hiccups, however, could impact continued economic improvement as we move into the latter stages of the year, according to the Stan Johnson report. It remains to be seen what the true impact of rising interest rates will be, if the Fed moves forward with the planned adjustment later this year.
Additionally, global economic uncertainties and increased volatility in less stable international markets could possibly pause the U.S.’s recent pattern of growth. The stock market turbulence witnessed in China, for example, illustrates that the U.S. economy is not immune to external forces. While investors should be watching these pockets of disturbances closely, it is unlikely that this instability will have significant or long-term effects on the strategies of most net lease investors.
— John Nelson