Is NNN Retail Still A Good Buy?

LOS ANGELES—Convenience store triple-net product hasn’t lost its appeal with investors. According to Jeremy McChesney, SVP at Hanley Investment Group Real Estate Advisors, the retail product type is still incredibly popular, with assets trading at record cap rates and per-square-foot pricing. McChesney specializes in the product type, and has sold 15 7-Eleven properties in the last 16 months. He recently sold three properties, two in Los Angeles and another in Orlando, FL, and broke the record cap rate for the year at 3.56%. In this exclusive interview, McChesney takes us inside the deal to show how and why these are such sought-after properties, and reveals the investment philosophy behind the trend. What is interest like for NNN convenience store properties, like these, and why are they good investment opportunities?

Jeremy McChesney: Interest remains high across the country for single-tenant net-leased properties. They offer a passive income stream that really plays well to people that are exchanging out of high management assets and want a no management asset with approximately the same type of return. Interest in single-tenant net retail properties is still strong across the U.S.; however, it is the highest in Los Angeles and Orange County.

With an AA- credit rating and zero land responsibilities, single-tenant 7-Eleven stores continue to be one of the most highly sought-after retail investments in today’s market. Strong fundamentals including having a long-term lease are becoming more important than ever for investors due to many uncertainties impacting the market like interest rates, stock market volatility, and the upcoming presidential election. Why were these three convenience store properties good investment opportunities?

McChesney: Each of the three properties had attractive fundamentals including well-established, high traffic, signalized corner locations, great proximity, and ease of access to major thoroughfares, good demographics and corporate-backed leases. The sale of the 7-Eleven in Culver City represented an incredible cap rate of 3.56%, the lowest cap rate nationwide for a 7-Eleven property that closed in 2016, according to CoStar. This is due to its prime location and the lack of available properties that come to market in West Los Angeles area. The sale of the 7-Eleven property in Orlando, Florida, represented a high $1,525 per square foot, also due to its desirable location and lack of available properties. And, certainly the sale of the 7-Eleven in Lakewood was still noteworthy at a cap rate of 4.25% cap rate and $677 per square foot. Why were the sellers disposing of these assets now?

McChesney: The seller of the 7-Eleven in Culver City purchased the 7-Eleven in Lakewood, a store that he had seen a number of years ago and had always wanted to acquire. The Lakewood acquisition represented an opportunity for the Culver City seller to increase the property size and overall asset value. The seller of the Lakewood property was a trust and probably wanted to liquidate its holdings for the benefit of the individuals within the trust, but I can’t confirm. The seller of the Orlando, Florida 7-Eleven wanted to sell the property to capitalize on the market timing and trade into another investment. What kind of interest did you get for each of these properties?

McChesney: We received numerous inquiries and multiple offers for both the Culver City and Orlando, Florida properties. However, the highest number of inquiries and offers went to the Culver City 7-Eleven property due to being a single-tenant net asset in core Los Angeles County. Southern California, mainly Los Angeles and Orange counties, is one of the most desirable markets throughout the country and with a tenant like 7-Eleven in West Los Angeles, the interest was off the charts, which drove the activity and price! How are these sales indicative of larger retail trends that you are seeing, if at all?

Jeremy McChesney: The Culver City and Lakewood 7-Eleven properties are good examples of continued investor demand for high quality assets in Southern California. There really is no lack of capital looking for A+ properties with A+ tenants in Southern California right now.

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