After a robust couple of years, investment sales activity for nearly every type of single-tenant property slowed considerably this past summer.
Garrick Brown, Northern California Research Director for Cassidy Turley, who was among the first to spot the trend, reported on it this past week in Cassidy Turley's Single Tenant Net Lease Investment Overview Fall 2012.
"By the close of the third quarter, it was apparent that deal velocity had simply slowed across the board and in virtually every region of the United States," Brown noted. "Though there is a natural lag time involved in gathering deals, our preliminary numbers and forecast final statistics for the third quarter of 2012 indicate slowing deal velocity (for net-lease properties) all around."
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Brown and others have a simple explanation for the decline. It is not, they contend, reflective of investor demand for this product, which continues to increase. Rather they say, there has been a notable drop off in the supply of available product from prospective sellers.
"The primary reason behind this slowdown is that the market continues to struggle with a lack of properties available for sale," Brown noted. "For example, we are currently tracking 302 drug store properties available for sale throughout the United States. At the beginning of this year, we were tracking 389 available properties. Drug store availability has fallen by 22% since our spring 2012 report. Fast food investment availability has fallen by 12%. Automotive property availability is down by 11%."
NNNet Advisors, a net lease investment brokerage firm based in San Francisco, is seeing the same trend. In its third quarter net lease report, NNNet noted that Burger King, Hardees / Carl's Jr., and Jack in the Box properties experienced significant decreases in new offerings. New Walgreens offerings were down by more than 50%.
For sale data tracked by CoStar supports these observations. For example, CoStar shows just 52 new drug store offerings having come to market in the past 60 days. That compares to 71 properties that have been on the market for 60 to 120 days.
CoStar shows 147 fast food restaurant properties coming to market in the past 60 days compared to 180 that have been on the market for 60 to 120 days.
According to Cassidy Turley, the only property type that has not experienced a significant decline in availability has been single-tenant industrial.
"The fact is," Brown noted, "that net-leased investments remain at the top of most investor wish lists, particularly when it comes to private investors. This is not just because of the relative simplicity of being the landlord of a single-tenant triple net leased investment, but also because of the security offered by some of the top users of these properties."
In its report, San Francisco-based NNNet Advisors noted: "This leaves one to ponder if only the riskier properties with shorter lease terms and tertiary locations are being marketed to the general public while safe properties with longer leases and strong sales histories are easily being sold without having to utilize major marketing efforts. Similar to other quality net leased property, we are continuing to see more and more deals being made off market as investor demand for new builds and long leases remain red hot. The current decrease in supply will likely continue to drive cap rates even lower in the short run."
CoStar sales data also supports NNNet's observations. Since the start of 2011, sales of drug store and fast-foot properties that had not been listed for sale accounted for an average of 33% of deals each quarter. The average number of off-market deals, however, has been increasing notably in the last two quarters and in the third quarter of 2012 accounted for 41% of all such property type sales.
In addition, NNNet noted, just as investors are keen on snapping up income-producing properties with creditworthy tenants, the current property owners are thinking twice "before parting with the investments that 'stuck by them' while they watched the value of many of their other investments rapidly decline."
The final factor impacting demand is interest rates may be historically low, but it's not easy to qualify for debt and most lenders will only consider properties that have the characteristics of the safe properties, NNNet noted. Even investors with the resources to purchase single-tenant net-leased properties all cash are being careful to select those that would have the greatest chance of qualifying for financing, if need be.
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