Greetings!
Welcome to Summer! I hope your Summer has started off well?
What else is happening in the world? Not much - just Fed rate hikes, immigration issues, trade issues, stock market swings, and North Korea! Despite this roller coaster of events, let’s take a deep breath and be thankful for the opportunity to be part of the quiet, easy and predictable world of single tenant net lease (STNL) investing.
We remain very optimistic about the STNL environment and wish you continued success. Give us a call at any time as your experienced and committed industry resource.
Warm regards, Nancy
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Nancy Miller, CCIM
President
Net Lease Investments
Bull Realty, Inc.
404-876-1640 x 118
NMiller@BullRealty.com
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IN THIS ISSUE:
- Market Update
- Industry Soundbites
- Ask Nancy
- Recent Sales
- Acquisition Opportunities
- Properties Wanted
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Fed Rate Hikes and the Impact on Net Lease Investors
On Wednesday, June 13th, the Fed raised the benchmark short-term interest rate a quarter of a percentage point. According to the Fed, economic growth has been “rising at a solid rate” which is an upgrade from “moderate” in May. All indicators are that they will have two more hikes before then end of 2018 for a total of four increases for the year.
What does that mean for real estate investors?
- As interest rates rise, cap rates will follow. This has a direct impact on reducing property values.
Example:
Assume that a fast food (QSR) credit tenant has 12 years remaining on the NNN lease. The property is well located, has good demographics, and a corporate guarantee. It was listed in January 2018:
- Price: $2,900,000 at a 5.9% cap rate. NOI is $171,100.
A 2nd rate hike occurs. Now, the Buyer, who is using financing, needs a higher cap rate to maintain the spread between the NOI (which is unchanged) and mortgage which went up 20 basis points. To remain competitive in the market, the Seller increased the cap rate from 5.9% to 6.1%. Here is the impact reduced value reflected in the asking price:
- The NOI remains constant at $171,100. The new price based upon a 6.1% cap rate which is: $2,804,918. This is a loss in value of $95,082 ($2,900,000-$2,804,918).
Will cap rates rise across the board?
Real estate fundamentals declare “Buy the best real estate you can afford.” Regardless of interest rate and cap rate behavior, investors who focus on the quality of real estate, in the long run, will see a greater likelihood of higher value appreciation, despite interest and cap rates.
Contact us (
nmiller@bullrealty.com) to discuss this further. We can also give you an idea of the current valuation of your net lease asset so you can make a better decision of whether to hold or sell at this time.
Implications for Net Lease Investors continued...
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I just returned from RECON in Las Vegas, the largest retail trade show in the world that is sponsored by ICSC (International Council of Shopping Centers). The show is attended by 40,000 or more individuals including commercial leasing or investment brokers, developers, public and private REITS, municipalities, vendors, lenders, tech firms, associations, etc. You get the idea – a massive opportunity to meet, greet, network, and learn via the ICSC offering several educational seminars.
Okay – so after four days of walking with an average of 13,000 steps per day on my fitbit, what are the takeaways? There are too many to mention, but here are a few that could be of interest:
1.
Sell Off? Owners may be looking to shed retail assets before
interest rates rise. There is a notion of profit taking, especially in the single tenant world.
2.
Re-purposing of Malls. Malls are getting a bit re-purposed in two ways: First, Millennials want “food experience”. More shopping centers are featuring “food halls” to increase traffic. Secondly, many older malls are becoming re-purposed for office, medical and schools. Others are having a communal resurgence as the framework for a larger live/work environment.
3.
Income Gap Impact. The gap between the top 10% of earners and the bottom 90% has been growing for decades. This is a fundamental challenge for the retail industry. This has caused discount brands and warehouse clubs to gain popularity which has caused a financial downturn in traditional malls and an upturn with value retailers like dollar stores.
4.
Amazon Impact. Amazon’s acquisition of Whole Foods has not been as disruptive to the grocery sector as anticipated. The price discounting has been minimal.
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Technology’s Role. Technology will play a greater role in retail – with online and instore sales, with the expectation of speed and convenience. Even QSR’s will see changes with the increased use of Uber Eats and GrubHub purchases. Let’s not fail to mention future store sales people – robots!
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More Live/Work Development. Mixed use developments will continue to integrate live/work and a strong sense of neighborhood and community. They will be well planned, walkable and feel like “small town America.”
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Sam’s Club to experiment with smaller “shop and go” format to compete with Amazon’s cashier-less convenience stores. The 32,000 sf store format will feature 1000-2000 items and be a digital/mobile experience. Items will include fresh foods, grab and go meals and some consumable items bought most frequently. The first store, located in Dallas will open in the fall.
READ MORE
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Fastest Growing Chains include:
- Mod Pizza (80% growth in sales)
- Blaze Pizza (50.8% growth in sales
- Shake Shack (32.5% growth in sales)
- First Watch (21.3% growth in sales)
- Cooper’s Hawk Winery (20% unit growth)
- Raising Cane (16.6% growth in units)
Source: Nation’s Restaurant News
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Gary in Florida:
“Nancy, I am looking for a secure long term tenant for my 1031 exchange. I am concerned about the impact of internet business on brick and mortar retail single tenant investments., Are there any safe investments for my 1031 exchange?”
Gary,
There are many excellent options for your exchange. We are bullish on discount small box and fast food tenants. Regardless of fluctuations in the economy, they remain safe for investors. We also like the single tenant medical sector – “doc in the boxes”, specialty medical (dialysis, dental), etc. Above all, make sure that the quality of the real estate (location, access and traffic counts) are good. They will ensure that your investment will more likely hold its long term value.
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- Sol Southwest Kitchen - Nancy Miller represented the buyer in the sale of 37 Sol Southwest Kitchen & Tequila Bar located in Charlotte, NC. The May 2018 transaction sold for $4,030,534 at a 6.55% cap rate with a 20-year NNN lease with options.
- Christian Brothers - Nancy Miller represented the buyer in the sale of Christian Brothers located in Concord, NC. The May 2018 transaction sold for $2,711,111 at a 6.75% cap rate with a 15 year NNN lease running through July 2032.
- Dog Haus Restaurant - Nancy Miller represented the buyer in the sale of Dog Haus Restaurant located in Murfreesboro, TN. The May 2018 transaction sold for $2,991,435 at a 6.90% cap rate with a 20 year NNN lease running through October 2037.
- Zaxby's - Nancy Miller represented the buyer in the sale of a Zaxby's located in Midwest City, OK. The June 2018 transaction sold for $2,111,597 at a 6.7% cap rate with a 20 year NNN lease running through April 2037.
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Acquisition Opportunities
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Cary, NC
- $2,291,800 or a 6.8%
- Corporate guaranteed NN lease
- 5+ years remaining
- Contact us for details
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Louisville, KY
- Back Up Contract Available!
- $1,763,000 or a 6.8%
- Corporate guaranteed NN lease
- 7+ years remaining
- Contact us for details
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Cypress, TX
- $3,285,000 or a 5.5%
- Corporate guaranteed NNN lease
- 10+ years remaining
- Contact us for details
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Pensacola, FL
- Back Up Contract Available!
- $1,961,500 or 5.85% cap
- 15-year absolute NNN lease with 14+ years remaining on initial term
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Two Tenant Retail - Sherwin Williams & Advance Auto Parts Powder Springs, GA
- Back Up Contract Available!
- $3,560,000 or a 7%
- Both tenants recently extended their NN leases
- Contact us for details
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Net Lease Properties $1.5 - $4M in larger metros only
10+ years or more
NNN only
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Valuation Services
Would you like to see what your property would bring in today's market?
CLICK HERE
The market is in short supply of quality net lease properties. You will never get more for your property than today. Don’t wait. Let us give you a no-obligation Broker Opinion of Value.
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Listen to the Net Lease Experts on the CRE Show
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Nancy Miller, President of National Net Lease Investments with Bull Realty and Fred Weir, President at Meadow Brook Restaurant Co. joined Michael in Studio One to examine trends in single tenant net lease properties including market and cap rate trends.
Watch Now
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The information in this newsletter is deemed reliable but is not warranted. Any information important to your business should be independently confirmed in an appropriate due diligence period. All rights reserved.
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