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.

 

Read the full article here: http://www.costar.com/News/Article/Baby-Boomer-Investors-Exchanging-Multifamily-Ownership-for-Net-Lease-Retail/170616

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