Cap Rates on Walgreens and CVS Properties Remained Flat

NNN Lease Market News



Cap Rates on Walgreens and CVS Net Lease Properties 

Cap rates on Walgreens and CVS properties remained flat with the quarter prior at 6.45 percent and 6.7 percent respectively, but cap rates on restaurants fell 25 basis points to 7.25 percent. Cap rates on McDonald’s restaurants in particular fell 20 basis points to 4.8 percent, and cap rates on Dollar General stores fell 15 basis points, to 8.1 percent.

In addition, cap rates on properties leased to banks compressed 35 basis points, to 5.5 percent. Still, the cap rate compression on the most popular properties was below predictions. Back in May, researchers with Marcus & Millichap Real Estate Investment Services estimated that cap rates on dollar stores and drug stores would fall 30 basis points each from the first to the second quarter of 2012, while cap rates on quick service restaurants would fall 60 basis points.

However, few of those properties are trading in the core markets. Finding a McDonald’s or a Walgreens for sale in a primary market has “gotten tougher because there is not a lot of new things coming out of the ground and partly that’s what pushed down cap rates, as well as [the fact that] interest rates have gotten so low,” says Jonathan W. Hipp, president and CEO of Calkain Cos., a Reston, Va.-based brokerage and consulting firm specializing in the net lease sector.

To compensate for lack of product in prime locations, net lease investors have been more willing to accept risk in exchange for higher yields. Some are starting to buy assets leased to A-credit tenants in second-tier markets, Hipp notes. Others are investing in franchise restaurant locations instead of corporate-owned properties because they like the sector’s healthy growth.

www.calkain.com

NNN Cap Rates Market Report

NNN Lease Market News

NNN cap rates declined by five basis points to just over 7.2% in the first quarter on average

The report covers trends in the macro economy with an eye on how these impact the net lease space.

It has found that the fit-and-start nature of the recovery has reinforced the appeal of net lease assets especially those with long term, high quality tenants. In addition, the sector is grappling by a lack of supply. The result of these multiple trends, not surprisingly, is that cap rates are low and getting lower. Namely, net lease cap rates declined by five basis points to just over 7.2% in the first quarter on average.

These rates, of course, fluctuate based on geography and tenant type. California and the Northeast, for example, claim the lowest cap rates.

The report also notes there is stronger investor demand for bank branches, pharmacies, and the best-performing fast food chains. Bank branches registered average cap rates of 6.1% in Q1, for example--100 basis points lower than the 7.1% average cap rate for pharmacies.

Investors, however, can be counted on to show a high degree of sophistication in their acquisitions not only across classes of tenants but specific tenants, as well. Sam Chandan, president and chief economist of Chandan Economics, tells GlobeSt.com. “Some pharmacy and bank branches are trading at sharply lower cap rates than their peers, even after controlling for variation in property quality and time to lease maturity.” For these most coveted assets, he says, debt yields are lower, as well, meaning that lenders perceive many of the same differences as relates to credit risk.

The most aggressive cap rates Jonathan Hipp, CEO ofCalkain, says he has seen has been in the mid 4s for “McDonald’s-type credit.”  Expect compression to continue, he tells GlobeSt.com. “Given where Treasuries are headed, people are looking for yield. Also, there is so much buyer interest in this product now we have gotten to the point where we almost don’t need new buyers. What we would like to have is more products.”

Not that the demand-supply imbalance will give investors pause, Hipp adds. “With everything going on, from the uncertain employment picture to the European debt crisis, at end of day people are still cautious on the economy. With the right combination of credit, location and length of lease it is a great time to be a seller in the net lease market.”

Or even a buyer, he says—but with a caveat. In this environment, current buyers should beware that an eventual exit strategy could happen in a period of higher interest rates and a diminishing flight to quality.

Source: GlobeSt.com

Saturated Real Estate Market Being Flooded

NNN Lease Market


The 2001 recession was relatively mild in comparison to past recessions and depressions
that the United States economy experienced. The main factors that contributed to this
short downturn, were the tech bubble burst, the terrorist attacks on the World Trade Center
and a series of very much publicized accounting scandals, such as that of Enron. The real
estate market was only slightly affected by this recession. Cap rates increased slightly while
many investors shied away from the volatile stock markets and decided to put more money
into real estate and especially the attractively liquid REIT market which proved to be a
quick and easy way to hedge risk.
Despite the NBER officially declaring June 2009 as the end of the 2007 recession, the data
shows that GDP has not reached average quarterly growth level of 3.28%
until the first quarter of 2010 and even showed a declining trend starting after the first half of 2010.
In comparison, the year over year growth did not reach the median until mid-2010.


Researchers agree that the recent recession was caused by "the collapse of the housing market
and the resulting sub-prime mortgage crisis that led to bank failures in the US and Europe."
Businesses had a difficult time obtaining credit for real estate acquisitions, refinancing, or new
developments. Record high oil prices are also quoted as a reason for the worldwide economic
downturn. The impact of this international recession could be seen in the stock, as well as the
real estate markets.


 As the liquidity crisis forced many businesses to sell part of their real estate
portfolios, the situation worsened due to the already saturated real estate market being flooded
with many more properties that had to be foreclosed or sold at sometimes half their prior values.

The commercial real estate market, as well as most other financial sectors, has been vastly

affected by the 2007 recession. Even though the recession was officially declared to be over, cap

rates and other economic measurements did not recover until many months after June 2009.

Demand for commercial real estate and GDP growth over the past decade have not been highly

correlated. Despite a relatively stable growth in the United States’ gross domestic product,

commercial real estate transaction volume skyrocketed until mid-2007 and then began to steeply

decline, indicating that investors put too much trust in the unsustainably increasing prices of real

estate. 

A valuable lesson than can be learned from this, is for investors to have a realistic outlook

on the future of their investments. Real estate is not, as it is commonly thought of, a “safe bet”.

However, it is one of the most stable and profitable investments one can make relative to S&P

500 stocks, which lost over 56% of their value in the 2007 market crash and only recovered 63%

of that loss over a course of almost three years.

www.calkain.com

Investors Lack Confidence in Net Lease Market

NNN  Lease  Market  News

Investors Lack Confidence in Net Lease  Market 


Even the CMBS markets have cooled. Where there were about $20 billion in CMBS loans completed by the second quarter and there were thoughts the year could hit $50 billion, now respondents almost unanimously agreed that there will be less than $40 billion in CMBS for the year.

More than 70 percent of 280 surveyed real estate CEOs, COOs and CFOs said they have a negative, or "bearish," outlook for the commercial real estate sector over the next 12 months. The poll, cited by Reuters, was conducted by global law firm DLA Piper in connection with its Global Real Estate Summit held today in Chicago.

A lack of confidence in the Obama administration, the general gridlock in Washington and poor job growth were reasons behind the pessimism. Though sales have increased this year, and prices are up 12.5 percent from their lows in April, investors worry that the Net Lease market will lose more footing.

"What you now see is a growing degree of uncertainty, and uncertainty begins to push money to the sidelines because people are much more reluctant to make a decision," said Jay Epstien, a partner with DLA Piper.

The 29.4 percent of respondents who were bullish on the Net lease market cited increased opportunity for profit as a reason to be optimistic. Even the bears conceded on that point. Seventy-four percent said they did not expect interest rates to change, 67 percent felt cap rates would remain unchanged, and 24 percent believed they would rise. 

However financing for deals will be hard to come by, according to about 90 percent of respondents. They expect the commercial mortgage-backed securities market to slow over the next year. Already, just $26.7 billion worth of securities have been issued thus far in 2011, down from $243.3 billion in all of 2007.

Investors have Shown a Willingness to Close at Cap Rates

NNN Lease Market News

By Winston Orzechowski,
Research Director, Calkain Cos.
Calkain’s investors have shown a willingness to close at cap rates ....

Net lease cap rates averaged 7.75 percent for the first quarter of 2011, continuing the rate drop that began in the second half of 2010. The key driver in this trend has been an increased demand for high-quality net lease properties — assets which feature a strong credit tenant, good location and favorable lease terms – and the scarce supply of those high quality assets. Investors have clearly shown a lopsided preference for these triple-net-lease investment properties and, as 2011 progresses, demand will outpace supply.
High quality credit rated net leases have routinely sold for caps below 7 percent and when the combination of tenant, location and market align, Calkain’s investors have shown a willingness to close at cap rates (Calkain closed a bank/pharmacy deal below a 5.9 percent cap) that rival the peak of the market. We saw the same thing happen in the last half of 2010 and if that trend continues, it is likely that – buoyed by the improving economy – other triple-net-lease asset types will see a compression in cap rates as investors look to jump into the market rather than await the delivery of new product.
Pharmacies
High-quality pharmacies such as Walgreens have long been the poster boy for net-lease properties. As a result, pharmacies continued to outperform the overall net lease average — 7.56 percent to 7.75 percent. However, it should be noted that the highest-quality pharmacies enter the market in the mid 6 cap range while the weaker performers in the pharmacy segment round out the cap rate average with significantly higher closing cap rates.
Banks
Not surprisingly, banks continue to have the lowest cap rate. Their average is far lower than the overall net-lease average, moving between 6.47 percent and 7.75 percent. The sector tends to have the strongest credit tenants overall and are most commonly traded as ground leases with regular rental increases over both the initial and renewal terms.
Quick-Service Restaurants
QSR cap rates declined from 2010 to 2011, moving from 7.65 percent to 7.42 percent, and are lower than the overall average, which moved from 7.42 percent to 7.75 percent. However, the average cap rate of 7.42 percent is not totally illustrative of credit tenant transactions with the corporate guarantee of McDonalds, Chik-Fil-A, or Yum Brands-tenanted properties – many of which trade in the low 6s. Furthermore, it should be noted that much of the QSR’s that are trading garner a higher cap rate because the tenant is a local or regional franchisee whose lack of strength as a guarantor is reflected in the higher closing cap rate.
Dollar Stores
Though higher than the net lease average – 8.63 percent to 7.75 percent – dollar-store cap rates have witnessed a precipitous decline. Between 2010 and 2011, they fell from 9.29 percent to 8.63 percent. This is not a surprise. Dollar stores continue to gain market share coming out of the recession. Look for lower executions of dollar stores as the summer progresses. Furthermore, Dollar General has moved to a more favorable triple-net-lease, driving cap rates down. Dollar General is also expanding in markets that are less rural, with better real estate fundamentals. There are also rumors that Dollar Generals credit is improving.
Causal Dining
Casual Dining observed a slight increase from 2010 to 2011, raising from 8.24 percent to 8.39 percent. This could be caused by a variety of factors. Most restaurant leases are franchisee not corporate guaranteed, increasing the cap rate. This segment is also not recovering from the recession as well as others with consumers showing a preference for the lower priced menus offered by the QSR segment. Shopping center vacancies have also had an impact on the sector due to decreased traffic at the center.
Big Boxes
Big boxes observed a definite cap rate decrease from 2010 to 2011 — 8.52 percent to 7.97 percent — with transactions in strong key markets closing significantly lower. While the tenants have strong appeal and often carry a solid credit rating, the transaction size, acreage and square footage of the investment (larger on all fronts than the typical net-lease investment) means that there is a more select pool of eligible investors for properties in this sector. The sector has displayed exceptional growth in the past decade and the performance of the retailers in this segment has found a new strength driven by an improving economy and consumer spending.