Investment Real Estate

Baby Boomers Help Net Lease Investments Reach New Highs

A new trend is emerging amongst Baby Boomers and appears to be changing the Commercial Real Estate outlook as we close out the first quarter, 2015. Many retirees tired of the management intensive requirements of multifamily properties have instead turned to the net lease sector for their investments. It appears many investors are selling their multifamily buildings to take advantage of 1031 tax-free exchanges. Existing property owners close to retirement or considering divesting within the next few years are moving forward while interest rates are still low. Multifamily sellers are taking the proceeds from the deals and allocating them into net-leased investments to provide steady cash flow without the management responsibilities.

Investors executing 1031-exchanges will dominate the net –leased market in 2015 as retiring baby boomers take advantage of record-low cap rates in the apartment market according to both Boulder and Marcus & Millichap analysis. The new demand for single-tenant net leased retail properties has brought the average price per square foot higher than pre-recession level prices. According to CoStar Group, the average price increased to about $263 per square foot this quarter, up from its low of $175. The dollar volume of deals completed last year is up as well to $25 billion, $7 billion more than 2013. This was the third consecutive year that volume has topped the previous high, and indications show pricing increases could continue.

It should come as no surprise that Dollar stores and fast-food restaurants are dominating the field of expanding retailers in 2015. Properties secured under long leases with national credit tenants are highly sought after, and more opportunities like these should be available this year as the pace of retail construction accelerates. According to CoStar records, restaurant and fast-food properties made up the highest percentages of net lease property sales over the last five quarters. Together these two segments accounted for 24% of all deals. Fast-food had favorable pricing at about $635 per square foot and casual serve restaurants averaging $377.

The next largest segment of sales activity for the quarter was Drug store properties making up roughly 8%. Drug store prices have remained constant around $360-$380 per square foot over the last five quarters. Trailing behind Drugstores are Service Stations and Convenience Stores making up 7.5% of sales. The price per square foot for service stations has averaged $700 and convenience stores are averaging $570.

Not only are prices rising, the increasing pool of capital from first-time net lease investors has created strong competition amongst buyers for net lease assets leading to historically low cap rates. By the end of the first quarter, single-tenant retail cap rates hit a new low of slightly below 6.3%. Looking forward, it is expected net lease investors will monitor the capital markets for potential interest rate rises and softening in asset prices.


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Investment Real Estate

Suburban Office Property Attracting Investor Interest

Suburban office property is finally experiencing increased investor interest. Suburban office vacancy rates were seen as high as 50% in some markets as a result of corporate downsizing both during and after the recession. Some analysts even gave up on suburban office properties altogether. Suburban office parks and shopping centers were seen as places where no one among the coming wave of millennials would want to work, shop or live. Recent changes however have Suburban office properties at the center of the action.

Yield-starved real estate investors priced out of expensive CBD assets and continued job growth is changing the game for suburban office property. In recent quarters, opportunistic and value-add plays have appealed to investors. Many of which involve vacancy risk that cohere with suburban office investments. Buyers have been enticed by the pricing spreads between well-leased properties north of 90% occupancy and challenged buildings between 50% and 75% occupancy, according to CoStar Portfolio Strategy. Although the spread has heavily declined from 144% in 2011 to only 97% in 2014, it is still double the 2006 level of 48%.

According to real estate economist Sam Tenenbaumin, investors are still able to achieve value-add boosted returns by leasing up a property. The best part for value-add investors is that 75% of metros will likely achieve occupancy gains over the next three years, making it easier to lease up vacant space.

Overseas investors are also aiding in the return of suburban office property. An increasing number of overseas investors whom usually focus on the safest core properties have been bidding on suburban office properties.

So what has made so many investors recently interested in suburban office properties? The success of this sector may be attributed to what the Wall Street Journal called “a casebook study of how to make money on suburban office property.” Rubenstein Partners and Grubb Properties paid $26 million for a vacant 67-acre office park in North Carolina’s Research Triangle Park and were able to sell it just 15 months later for $127 million. The pair of investors planned to upgrade the vacant office buildings and put the space up for lease. They were able to lease out the entire campus to Lenovo Group Ltd.

Success stories like that tend to attract a lot of interest from investors looking to test the market. Many property owners who were able to hold onto their suburban office assets through the recession are eager to lease their vacant spaces in hopes of high returns.

Meanwhile, other investors are moving in to take advantage of the improving prospects for the suburban office market. These investors are attracted by declining vacancy rates amid stepped up leasing volume and historically low levels of new construction.

With the rise of suburban office property, investors are beginning to view half-leased properties as half full rather than half empty and are taking advantage of these opportunities.