Archives for January 2021

Outlook for 2021, however, is more uncertain.
While many sectors of commercial real estate continued to struggle in the fourth quarter of 2020, investors’ preference for net lease assets remained strong. Investment sales activity in the sector rose to the highest level in four quarters and average cap rates reached record lows, according to the most recent report from the Boulder Group, a boutique real estate investment services firm specializing in single-tenant net lease properties. At the end of the third quarter, the net lease share of all investment sales activity in the U.S. commercial real estate market reached 18.4 percent, compared to its five-year average of 11.8 percent, reported real estate services firm CBRE.
While the Boulder Group is still estimating the total volume of net lease investment sales that took place in the fourth quarter of last year, it expects that it will be the highest posted in 2020. An estimate made by the net lease brokerage firm Stan Johnson Co. at the beginning of the quarter put the full-year figure at around $50 billion, a drop of about 37 percent compared to the volume of sales closed in 2019, but still more than double the annual volume the net lease sector was able to achieve a decade ago, according to Stan Johnson researchers. The relative strength of activity in the net lease sector was driven by a combination of optimism surrounding the COVID-19 vaccine approvals, the outperformance of tenants involved in e-commerce operations and the record low interest rates.
Those same factors helped drive average asking cap rates lower on net lease assets occupied by retail and industrial tenants, especially as the transactions that did take place involved higher quality properties, according to the Boulder Group report. In the fourth quarter, average asking cap rates dropped by 13 basis points for single-tenant industrial net lease assets, to 6.75 percent, and by 6 basis points for single-tenant retail assets, to 6.00 percent. Average asking cap rates on single-tenant office properties stayed flat, at 6.90 percent. In cases where the properties were occupied by strong credit tenants with long terms remaining on their leases, the cap rates were sometimes far below the average. For example, the sale of an Amazon-occupied industrial facility in Chandler, Ariz. with 12 years remaining on its lease closed at a cap rate of 4.56 percent, the Boulder Group reports. The sale of a 7-Eleven in Riverview, Fla. with 14 years remaining on its lease closed at a cap rate of 4.95 percent.
According to Stan Johnson data, cap rates on sales of all net lease properties averaged 6.15 percent at the end of the third quarter, down 5 basis points compared to the same period in 2019. Industrial cap rates averaged the lowest, at 6.05 percent, followed by cap rates on retail-occupied assets, at 6.14 percent, and office-occupied assets, at 6.28 percent. However, through the third quarter, sales of office and industrial net lease properties drove 80 percent of the market’s investment sales activity, Stan Johnson researchers note. Those were the assets favored by publicly-traded REITs and institutional buyers, while private buyers accounted for 72 percent of transactions involving single-tenant retail properties.
Overall, domestic private buyers continued to be the investor group most active in the U.S. net lease market, according to Stan Johnson Co., though their share of the market shrank from 41 percent in 2019 to 39 percent in 2020. There were somewhat fewer international buyers looking for net lease acquisitions in 2020, accounting for 9 percent of the market vs. 12 percent in 2019. But domestic publicly-traded REITs increased their share from 14 percent to 16 percent and end-users increased their share from 8 percent to 10 percent during the period.
The strength the net lease sector has shown in 2020, however, does not necessarily mean things will continue to chug along smoothly in 2021. Among the uncertainty net lease investors face is not only the fate of any additional stimulus for the U.S. economy and the pace of vaccine distribution, but the new Presidential administration’s plans for 1031 exchange transactions. President-elect Joe Biden has previously said he would like to do away with 1031 exchanges for investors with annual incomes greater than 400,000. If that measure comes to pass, it would “severely impact the net lease sector,” according to the Boulder Group report.
Source: “Net Lease Sector Showed Strength in the Fourth Quarter of 2020“

Most people want to store their possessions within three miles.

If you’re looking at a high-growth market, like Dallas, Nashville and Charlotte, to place a self-storage facility, you might need to zero in a little closer, according to Nick Walker, executive vice president, Capital Markets, Self-Storage for CBRE.
“I would say that you get 70 to 80% of your tenants [in self-storage] in a three-mile radius,” Walker said on CBRE’s “The Weekly Take” podcast. “And it used to be a lot tighter than that.”
Walker says the navigation features on smartphones have expanded the map for storage facilities. People will hit the blue dot on the map, even if it isn’t the closest facility.
“You might have passed the closest facility to you,” Walker says. “But because of that evolving [technology], we’ve seen it expand a little bit. But generally speaking, the bulk of your tenant base comes within under three miles of your storage facility.”
While Spencer Levy, chairman of Americas Research and senior economic advisor at CBRE, pointed out that industrial facilities are usually not permitted close to residential centers, Walker said he saw these storage facilities as light industrial zoning.
“You can get a special use permit or something in that form or fashion in some neighborhood commercial kind of a district,” Walker said. “So that generally puts you closer to the residential.”
While some localities will allow self-storage to be closer to the population, in Los Angeles, you can find 15 or 16 self-storage facilities on one street. “In that particular city, that zoning only allows for storage to be in that one district,” Walker says.
Liz Schlesinger, founder and CEO, Merit Hill Capital, agrees that self-storage is hyper-local because people want to be near their possessions. But ultimately, she says pricing drives people’s decisions. “So the more population within a three-mile radius and the more income, the better,” she says. “But when you start layering prices in that, those are often much more expensive markets to buy in. And so it really depends on your risk return profile.”
Merit Hill Capital wants at least 25,000 people with $45,000 to $50,000 of median income within three miles of its facilities. In 2006, the company began investing in secondary and tertiary markets and “did quite well,” according to Schlesinger.
Those markets have grown crowded as investors have searched for yield. “More and more people have been moving to the secondary and tertiary markets,” Schlesinger says.
As this has happened, Merit Hill Capital is circling back to more primary markets. “We find that the spread between the secondary in the primary isn’t that high there and it’s not as high as it should be right now,” Schlesinger says.
Source: “Self-Storage is a Hyper Local Story“

Retail continues to be about location, and as a result, retail’s recovery has varied widely in the past several months for many reasons, according to Placer.ai’s year-end analysis.

Despite the major wallop that was unleashed by the pandemic, retail continues to be about location, location, location. As a result, retail’s recovery has varied widely in the past several months for many reasons but primarily because of where the store is located.
Placer.ai recently examined the retail space to pinpoint how the recovery unfolded toward the end of 2020. Since mid-June, overall retail visits were down between 11% and 15%. And while this number seems relatively strong, it is buoyed by the improved performances of sectors such as home improvement and grocery.
Another key takeaway is the wider retail landscape was posting steady improvements heading into the holiday season, prior to the resurgence of COVID cases in November.
However, during the week of November 23 which included Thanksgiving and Black Friday weekend, visits were down 25% for the overall retail sector. This represented a step back following several weeks of improvement heading into this key retail weekend. This backslide in what was otherwise a steady recovery stream was especially problematic in terms of timing.
Regional Perspective
But throughout the pandemic, outcomes have not been uniform across the country due to stricter gathering restrictions in some states. For Louisiana, overall retail visits were down just 2.5% year-over-year during the week beginning November 30. Yet, in California, a key state where many retailers have the largest number of locations but stronger restrictions, visits were down 20% year-over-year in the same week. In other significant retail states such as Texas, New York and Florida, overall retail visits were down 12.5%, 12.9% and 10% respectively year-over-year during that week.
Sector Positioning
Another area where a lack of uniformity has been even more significant is within different retail subsectors. Weekly visits from the week of October 19 through the week beginning November 30 point to stark differences. While weekly visits to the wider apparel sector were down an average of 25% during that period, the dining sector had an average visit decline of 32%. On the other hand, the grocery space including hard-hit brands such as Whole Foods had an overall average decline of just 2% during that timeframe. At the same time, the home improvement sector had an average year-over-year increase of 11%.
Why does this matter? A more widespread perspective on the retail landscape can point to several critical factors.
First, it establishes a benchmark to which brands across specific sectors can be compared. Second, it provides a better sense of the overall effect, including the obvious takeaway that brick-and-mortar retail is still very much a fundamental piece of the puzzle. Quite simply, in-person retail is not dead. It faced the worst possible combination of events and continued to post massive visit numbers in some areas.
A final valuable component is the differentiation between the unique challenges facing brands within specific regions or sectors. Recognizing factors such as varied regional distribution can help contextualize performance, providing valuable indicators about which brands could bounce back most quickly.
Source: “Digging Deeper into Retail’s Recovery“