Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/566807
52 • September 2015 • Western Real Estate Business www.REBusinessOnline.com L ow cap rates, cheap debt and a bevy of creditworthy tenants seeking spaces are just a few of the reasons the single tenant net lease market has heated up throughout the nation. The market has gotten so hot, in fact, that many now consider it a seller's market. "It's a seller's mar- ket nationwide," says Dan Hooge- steger, a net lease advisor in Sands Investment Group's Santa Monica, Calif., ofce. "Many own- ers of investment properties believe we have hit the peak of the market and are at a point where prices will soften in the near future. For this reason, a number of owners who were waiting on the sidelines now recognize this is their time to sell, rather than risk pric- es beginning to drop." Many STNL investors remember the burst from the last market run and are making a concerted efort not to re- peat the past. These cautionary senti- ments are made all the more meaning- ful by the fact that many believe the Fed will raise interest rates in the next six months. Then, there are those who need to free up capital for the next big venture or who want to unload a troubled property while they still can. "We are seeing more owners enter the market now simply because they are sensing that the market is hitting a peak and they don't want to miss the window of opportunity to maximize value," Hoogesteger continues. "The current activity we are experiencing has created a great marketplace for both brokers and sellers." Mountain State Momentum The Mountain states of Colorado, Utah and Idaho is one region out West where STNL activity has been particu- larly favorable for sellers. "The Mountain states all favor sell- ers right now — they have for the past few years," notes Chris Hatch, a principal broker with Mountain West Retail and Investment Commercial Real Estate in Salt Lake City. "Without a doubt, investors are gravitating to- ward the Mountain states, particular- ly investors from California and Tex- as. We're seeing a lot of people coming out of apartments and into net lease retail deals." Hatch attributes this extra atten- tion to the grocery boom the region is currently experienc- ing. He notes that Smith's Food and Drug, Kroger's lo- cal grocery arm, is well into its plan of claiming 65 percent of the Utah market over the next few years. Meanwhile WalMart, Sprouts and Whole Foods have also expanded in the area. "Grocers are booming right now," Hatch says. "The vast majority of in- vestors in the grocery boom are insti- tutional. This anchor activity is driv- ing new development in a market that has been stagnant since the recession, with a high pent-up demand for retail shop space and pads." Excel Trust is one REIT that took no- tice of the boom. The San Diego-based entity purchased a three-property shopping center portfolio in Utah from DDR Corp. for $223 million in late 2014. The transaction included Fam- ily Center at Fort Union in Midvale; the Family Center at Taylorsville in Taylorsville; and the Family Center at Orem in Orem. The Fort Union prop- erty is anchored by a 236,370-square- foot WalMart and a 65,755-square-foot Smith's, which account for 70 percent of the center's occupancy. Excel (now owned by Blackstone) held this prop- erty, along with the Orem asset. It sold the Family Center at Taylorsville, which was 25 percent vacant at the time, to TriGate Capital for an undis- closed sum as soon as the transaction closed. "We see this acquisition as an op- portunity to enhance our portfolio by securing a foothold in a strong market where Excel Trust already has a man- agement presence," said Gary Sabin, Excel's CEO, at the time of the sale. "Utah is a business-friendly state and boasts some of the best employment and economic data in the nation." California, Here We…Go Hoogesteger agrees with Sabin that investors must gauge the business- friendly climate of a particular geo- graphic area. This is one of the reasons he believes California-based entities have begun looking outside the state for the next great deal. "There are diferent drivers for com- panies in the Western U.S.," Hooges- teger explains. "More developers are selling. There are also many frms that now have external reasons to sell — where they may not have typically considered it — because they now have an opportunity to lower their debt position or exchange out of one state into higher-yielding property in another state. This is especially true for California. It's hard to resist sell- ing at such low cap rates on the West. Many sellers will exchange out of California into a more pro-business state." He notes there are markets where real estate fundamentals are stron- ger, and where tax incentives and business-friendly attitudes reign su- preme. While location may be part of STNL MARKET HEATS UP IN MOUNTAIN STATES, COOLS IN CALIFORNIA The single tenant net lease (STNL) market can be a godsend for investors who get in at the right time, but this market is not evenly distributed. While opportunities still exist in some regions, others have cooled off. By Nellie Day Hatch Hoogesteger Sands Investment Group recently sold the 23,866-square-foot Cost Plus World Market in Torrance, Calif. The company has about eight years left on this lease term, with one, fve-year option remaining. In addition to its $200 million Single Tenant Net Lease Fund that will focus on the West Coast, Texas, Sunbelt and New England, DJM Capital Partners is also developing Pacifc City. This mixed-use asset will include 191,000 square feet of boutique and national-tenant retail, restaurants and outdoor dining options, along with 516 luxury residences and a 250 room boutique hotel. Sands also recently sold a brand- new, absolute triple net lease on a McDonald's in Indianapolis. The newly constructed space is situated on the top out-parcel pad near a new WalMart Neighborhood Center.