Net lease properties are not immune to the challenges facing other kinds of commercial property—namely a difficult financing environment, a recessionary economy, rising cap rates and a steep decline in sales transaction volumes—but new data shows that the single-tenant marketplace is faring better compared to its multi-tenant counterparts.
Dubbing the single-tenant market "a relative bright spot in a dim marketplace," a new US Capital Trends report released last week by Real Capital Analytics Inc. notes that while it has suffered along with the rest of the market, "it is doing slightly better on a relative basis."
Volume of single-tenant property sales has declined, to be sure; RCA reports $3 billion of single-tenant properties changing hands during the first half of this year, which equates to a 60% drop from the same period last year. For retail and industrial properties, transactions are down 70%; for office assets, transactions are down 50%.
But—and here's the cup is half full point of view—single-tenant property sales accounted for nearly one-quarter of all retail, industrial and office sales during the first half of this year. That, RCA's report notes, is "a significant rise over the 10-15% market share averaged over the past few years."
Likewise, while cap rates have certainly increased for single-tenant properties, the ascent has not been as steep as the increases for multi-tenant assets. Since the market peak in late 2007, RCA notes, cap rates for single-tenant deals have increased by more than 60 basis points, while cap rates for multi-tenant properties have increased by more than 100 basis points.
"When the market was bullish on rent growth and occupancies in 2006 and 2007, multi-tenant buildings traded at a premium to single-tenant properties—they offered more near-term ability to capture the benefits of rising rents," RCA's report states. "Now that premium has turned to a discount, as investors value the security of a long-term lease to a single-tenant. On average, single-tenant properties are now trading 30 basis points lower than multi-tenant properties."
Sale-leaseback transactions, meanwhile, are down by about two-thirds. "Sale-leasebacks, which accounted for 30% of single-tenant property sales in 2007, have accounted for just 10% in 2009," RCA reports. As a result, "with the decline in sale-leasebacks, a large contributor to the single-tenant marketplace is now largely absent. Combined with perhaps heightened interest for the security of a fully leased property, competition among buyers for the available single-tenant assets could help sustain prices for such deals."
Even more analysis of the single-tenant marketplace can be gleaned from RCA's most recent quarterly special reports. In terms of dollar volume of transactions, drugstore properties have been faring best; the 12-month period through the second quarter of 2009 saw a decline of 49%, compared to a 74% decline for all retail properties. For the same 12-month period, single-tenant industrial fared second best with a 62% decline in dollar volume, compared to a 70% decline for all industrial asset sales.
Next in line were big box retail assets; the dollar volume of sales dropped 63% during the 12-month period through Q2 2009. Dollar volume for all single-tenant retail assets declined by 66% (again compared to all retail assets, which declined by 74%). And the volume of single-tenant office asset sales decreased by 69% during the same 12-month period, compared to a 75% decline for all office property transactions.