When Single-Tenant Retail Is Worth The Risk

LOS ANGELES—Good location and sustainable rental rates are among the characteristics that help mitigate the risk of single-tenant retail, Hanley Investment Group’s Bill Asher says in this EXCLUSIVE interview.

LOS ANGELES—Following the closures of several large retail chains earlier this year, single-tenant retail investments seemed to have mixed reviews. While low-maintenance, they might now be high risk if there is a vacancy. The recent sale of a Petco in Redondo Beach, however, told a different story. The deal traded hands at a record cap rate in the market of 4.5% and commanded high interest from investors. Bill Asher, an EVP at Hanley Investment Group, says that these properties are still great investment opportunities and have strong investor demand. Asher—who represent the seller in the transaction along with president Ed Hanley, while Joe Miller, VP at Voit Real Estate Services represented the buyer—sat down with us for an exclusive interview to discuss the market for single-tenant assets and how buyers can mitigate risk in this changing retail climate.

GlobeSt.com: There have been a lot of mixed opinions about single-tenant retail investments. What is your opinion?
Single-tenant retail investments are still an attractive passive investment with minimal management responsibilities for investors. Their triple-net lease structures typically have the tenant responsible for most expenses, creating a hands-off investment and reliable income stream. Historically, they have been frequently acquired by 1031 exchange buyers that have sold management intensive investments; i.e. multi-family. We have also seen a lot of older investors purchasing these types of assets for estate planning purposes and holding these type of properties long-term to pass down to their heirs. They will continue to be the most sought-after retail investments in today’s market and in the foreseeable future because they offer investors a long-term lease with rental increases within a price range that is often affordable for a majority of buyers.

GlobeSt.com: What characteristics of the property and location should an investor look at before purchasing a single-tenant asset?
Properties situated within dense infill areas at high-traffic signalized locations are the primary characteristics investors are seeking. Other important attributes include accessibility, frontage and visibility, and that the property is situated on a major thoroughfare. Other significant factors investors consider are credit anchor tenants within the shopping center or at the intersection generating overall daily consumer traffic, i.e. Walmart, Target or Costco.
GlobeSt.com: This year, there have been a lot of store closure announcements that will leave some major vacancies in single-tenant properties. What are the risks of a single-tenant investment and how do you mitigate those risks?
You mitigate your risk by seeking to purchase good locations with a tenant paying a below-market or sustainable rent that is replaceable in the future if the tenant ever vacates. Even with recent store closures and vacancies in the big box and junior box sector, landlords are backfilling spaces with new tenants such as Aldi and Grocery Outlet in the southern California market, or existing tenants aggressively expanding to take more market share like 99 Cents Only, Smart & Final and Sprouts in the grocery segment. Other larger vacancies are transitioning to multi-tenant uses, i.e. a former Albertsons single-tenant building turning into a Smart & Final and Dollar Tree multi-tenant building. Smaller retailers such as Starbucks and Coffee Bean are backfilling previously vacated fast-food buildings.

GlobeSt.com: The Petco transaction got a lot of interest. Was this an anomaly, or does it speak to the investor demand for these types of products, despite the risk? What is driving this demand?
The demand was tremendous because it was an affluent coastal location in southern California. Petco had a 22-year operating history at the center and had just recommitted to the location with a long-term extension prior to marketing the property for sale. Investors also recognized that Petco’s rent was sustainable and replaceable in the future if anything ever changed. All of the above were characteristics that resulted in 10 offers in two weeks that led to a best and final bidding process and an eventual sales price over the original list price. The demand was driven by investors willing to pay a premium for a flight to quality with strong fundamentals and low risk.

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