Market For Starbucks Heats Up In CA

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IRVINE, CA—Cap rates for Starbucks stores are decreasing significantly, reflective of this store’s real estate fundamentals and award-winning, redeveloped design, Hanley Investment Group Real Estate Advisors associate Jeff Lefko tells exclusively.  Lefko was the main broker responsible for completing the sale of a new construction single-tenant Starbucks with a drive-thru located at 625 E. Redlands Blvd. in Redlands, CA. The purchase price of $2.6 million represented a cap rate of 3.76% which, according to CoStar, achieved multiple records: one of the lowest cap rates nationwide for a single-tenant Starbucks and the lowest cap rate for a fee-simple Starbucks in Southern California.

Lefko and HIG EVP Bill Asher, in association with Tricia Kim of Citi Property Services Inc. of Santa Clarita, CA, represented the seller, Pacific American Development LLC of Newport Beach, CA. The buyer, a private investor based in California, was represented by real estate broker Karl Duistermars, based in La Crescenta, CA.

The newly “reconstructed,” 1,804-square-foot building in San Bernardino County is situated on .35 acres and received the American Planning Association’s 2016 Urban Design of the Year Award for its preservation of the historic nature of the building when it was constructed in February 2016. The building includes an iconic neon sign and pays homage to the original 1960s Baker’s Burgers drive-thru. According to Michael Skellern, CEO of PAD, “We worked closely with Starbucks Coffee Co., the City of Redlands and our construction team to create a historic landmark, a high-performance retail location and a solid investment opportunity for the buyer.”

According to Lefko, the market for single-tenant Starbucks remains very strong in California. Four single-tenant Starbucks properties sold below a 4.25% cap rate in the last 90 days, and at least three are currently in escrow and scheduled to close below a 4.25% cap rate, according to CoStar research. On a national level, there were 79 single-tenant Starbucks properties that sold in 2016, and 18 of those sold below a 5% cap rate, with 17 acquired by buyers based in California.

Lefko says, “The Starbucks in Redlands represents the first sub-4% cap Starbucks to sell in the Inland Empire, which is reflective of the property’s strong real estate fundamentals and award-winning, redeveloped design,” said Lefko. “The overall price point appealed to a large buyer pool including multiple 1031-exchange buyers who pursued the investment at a sub-4% cap rate, with the eventual buyer closing at record pricing.”

Asher adds, “The property benefits from its highly visible location close to Downtown Redlands, proximity to the University of Redlands (4,500 students) and within walking distance to Redlands High School, home to more than 2,300 students.”

Lefko notes that this particular Starbucks property also benefits from a lack of drive-thru coffee competition in the trade area. “There are no freestanding Starbucks drive-thru locations within a two-mile radius of the property. Additionally, the average household income in a three-mile radius is in excess of $88,000.

Even with the recent spike in interest rates in the last three months, investor demand for new, well-located single-tenant triple-net leased properties is still very strong in today’s market, Lefko says. “Buyers continue to pay premiums for these types of properties seeking long-term stable cash flow, with relatively low risk and little to no maintenance. As investors continue to look for security, we expect that the demand for high-quality retail assets will remain strong through 2017 and prices to remain fairly steady in the single-tenant retail sector for investments priced $5 million or less.”

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