4B — August 31 - September 13, 2012 — Shopping Centers — Mid Atlantic Real Estate Journal


S HOPPING C ENTERS By Mark Taylor, Marcus & Millichap Net Lease Activity 3rd Quarter 2012

• Project Management

• Development Due Diligence & Feasibility Studies


s we approach the end of summer and the third quarter of 2012, we can

the Northeast and New England, retail rents have stabilized (in many cases creeping up), vacancy rates have decreased, and leasing activity has increased. The combi- nation of all of the above has cre- ated a perfect storm in the single tenant net lease sector. Cap rates are back to pre-recession levels with demand being fueled by in- stitutional buyers, 1031 exchange buyers, and buyers fleeing other investment vehicles. Cap rates for new CVS and Walgreens drug stores are down to 6.0% to 6.25%, and in some metro New York and Washington DC locations below 6.0%. National or large regional

banks are seeing their branches on new 20 year NNN ground leases with rent increases every five years being sold at cap rates as low as 5.5%. McDonalds are being sold for cap rates between 4.5% and 5.0%, and other fast food concepts with corporate signed leases are selling for almost as low a cap rate. An important new development in the single tenant net lease sec- tor is the change in business model by two of the leading convenience store chains, Sheetz ofAltoona, PA., and WAWAof Wawa, PA (suburban Philadelphia). Until recently, each of these two privately held but well regarded chains owned their real estate and funded new store development out of operating rev- enues. Now, each has embarked on a development program partnering with developers who find, acquire, and entitle a parcel of land, which Sheetz or WAWAthen ground lease from the developer. Sheetz has a 15 year lease while WAWA has a 20 year lease. Many of the developers are selling these at very low cap rates. My team here at the Marcus & Millichap Office in Philadelphia has put several of these properties (with new leases, not older ones) under letter of intent or contract at cap rates from 5.65% to 6.25%. Many investors are migrating to these types of assets from drug stores because the leases have periodic rent increases, and the business model of the convenience store (with gas pumps) is perceived as recession proof and immune from online retailing. Of course, the opposite of that trend is the difficulty of selling single tenant net leases assets where the tenant’s business model is subject to changes in consumer habits. Best Buy today is still an investment grade ranked company. But the investment community has very swiftly concluded that despite that, Best Buy is a large risk and no credence is given to that rating. Best Buy stores are now viewed as “real estate” deals and priced on the real estate fundamentals specific to a store and the market it is in. There is still a real lack of supply of big box retail stores for sale (Wal- Mart, Lowes, Home Depot, Kohl’s, Target, and clubs like Costco, BJ’s Wholesale Club and Sam’s Club). There are very few data points on which to rely in establishing value other than comparing them to their smaller investment grade drug store cousins. Mark Taylor is First Vice President of Investments and Senior Director, National Retail Group of Marcus & Millichap. n

• Agency Permitting

• Land Development Design

now w i t h a degree of con- f i d e n c e pu t a frame and context on the market for re- tail investment real estate for the year. 2 0 1 2 h a s

• Construction Phase Services

• Graphic Services

PHILADELPHIA METRO OFFICE: 8614 Montgomery Avenue Wyndmoor, PA 19038 215-836-2510 LANCASTER OFFICE: 1853 William Penn Way, P.O. Box 10368 Lancaster, PA 17605-0368 717-672-0614

PITTSBURGH OFFICE: 201 Penn Center Boulevard, Suite 400 Pittsburgh, PA 15235 412-253-6569

NEW JERSEY OFFICE: 100 Overlook Center, Suite 200 Princeton, NJ 08540 609-920-0268

Mark Taylor

been a year of increasing veloc- ity in the market, significant cap rate compression (in Seller’s favor), historically low interest rates, and increased demand. In


Taylor | Zang | Munley | Dougherty of

Philadelphia, PA 215-531-7000

Washington, D.C.

www.TaylorZangMunley.com 202-536-3700





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