Net-Lease Single-Tenant Market
Net-Lease Assets Favored Amid Limited Development Cycle
Consumption growth steady as hiring extends into sixth year. The continued employment growth cycle has helped support consistent gains in retail sales despite tepid wages. For retail center owners, positive economic momentum has steadily tightened vacancy without sparking significant construction. To address limited space availability, retailers have been working with developers to expand the pipeline of single-tenant floor plans, with deliveries topping 39 million square feet in 2015, accounting for the vast majority of retail completions. While internationally driven headwinds prompted some volatility in the first quarter, positive traction has boosted confidence and limited caution, at least for the short term. Considering bars and restaurants have been a leading retail growth sector, the outlook for these and other net-leased assets remains strong.
Investors trading out of other assets via 1031-exchanges lead net-lease buyer pool. As a growing number of property owners near retirement, many are choosing to transition their investment portfolios from apartment assets that are trading at a premium into net-leased retail properties throughout the U.S. Benefits can include higher initial yields than other low-maintenance options and reduced volatility relative to other property types. Net-leased properties offer a wide range of choices with average cap rates in the mid-5 percent range, depending on location and tenancy. While pending mergers and minimum-wage concerns made headlines in several net-leased sectors, deal flow was limited by a lack of available listings rather than a slowdown in demand. Investors typically use cash to close transactions, underscoring the amount of capital readily available for well-positioned assets with corporate credit tenants. Although cap rates are likely to remain stable due to the tight spread between credit financing and prices, willing investors continue to actively search for attractive offerings. With several states considering more stringent definitions of like-kind exchanges, potentially limiting where acquisitions can be made, the current demand for net-leased properties remains robust.