Of the five subsectors of single-tenant retail tenants analyzed in Marcus & Millichap's report, dollar stores experienced the smallest increase—50 basis points, to 8.5%—in average cap rates between third quarter of 2008 and third quarter of 2009. "Dollar stores have become increasingly popular as consumers look to cut expenses, with many major chains reporting growing same-store sales and profits," the report states. "Nevertheless, transaction velocity in the dollar store segment has slowed moderately over the past year, and cap rates have edged higher." Dollar General, Dollar Tree and Family Dollar have been reporting increases in same-store sales, and all three are planning to open new stores.

"Strong operating performance among dollar stores has attracted buyers, with sales activity declining just 10% from year-earlier levels," the Marcus & Millichap report states. "The media price has dropped just 3% year-to-date to $98 per square foot due to strong sales and increased tenant profitability."

In a similar vein, discounters like Costco, Wal-Mart and Target "are expected to continue to benefit in 2010 from increased traffic and market share gains as consumers look to maximize value on all purchases including food and consumables as well as general merchandise," notes Fitch. Low single-digit comparable store sales increases are expected next year, as is an expansion of some of these retailers' footprints. "Store expansion will continue in 2010 given easier access to attractive real estate in terms of locations and pricing," says Fitch.

Overall, between Q3 2008 and Q3 2009, big-box retail properties saw a 60 basis point increase in average cap rates to 8.2%, according to Marcus & Millichap, and sales velocity fell 25% and media price fell 31% through September of this year. While bankruptcies early in 2009 left a number of properties vacant around the country, "re-tenanting is gaining momentum." The report notes that "Kohl's is accumulating capital to move into vacant properties, which could drive sales activity and absorption next year."

Drugstores

For the third quarter of 2009, average cap rates for drugstores were 7.5%, up 70 basis points over a year earlier; transaction velocity was down 35% year-to-date, but median price was up 8%, according to Marcus & Millichap. And while the two main players in the category, CVS and Walgreens, have had positive same-store sales growth and continue to expand their store base, investors have been more cautious on the segment: "Despite strong operating fundamentals among the drugstore segment's market leaders, investor demand for these properties has waned from the heights of a few years ago."

Still, recent data from Real Capital Analytics Inc. might indicate that the sales volume trend for drugstore properties is beginning to reverse: RCA tracked $110 million of drugstore property sales in the third quarter, an increase from the second quarter's $80 million (though lower than the first quarter's $160 million).

"Top line growth at drug retailers is expected to remain steady or improve modestly in 2010," says Fitch. But the outcome of healthcare reform initiatives on Capitol Hill and its impact on prescription reimbursements is a "wildcard."

Restaurants

Fitch's outlook for restaurants is for "sales trends for US restaurants to improve modestly during the second half of 2010," although it notes that "due to continued weakness in consumer discretionary spending, same-store sales trends for the restaurant industry remain negative and near-term visibility is limited." In particular the ratings agency "continues to view the quick-service restaurant (QSR) segment as better positioned to withstand the currently difficult consumer environment," says Fitch. "The QSR segment has held up better than full service dining during most of the economic downturn."

In terms of sales of the single-tenant properties they occupy, QSRs have seen less of an increase in average cap rates than the casual dining segment. From third quarter 2008 to third quarter 2009, the average cap rate for QSR properties increased 80 basis points to 7.7%, according to Marcus & Millichap, while in the same period average cap rates for casual dining properties rose 100 basis points to 8.2%.

"Fast-food firms are upgrading menu offerings and store layouts to attract spillover demand from declining customer traffic at casual dining restaurants," the real estate services firm notes. "Sales activity among quick-service restaurants dropped off approximately 30% in the first nine months of 2009. The media price held fairly steady, declining just 2% to $431 per square foot, even as transaction velocity slowed…With fewer deals getting done than in recent years, quick-service restaurants, particularly those with national-brand tenants, will remain popular with investors."

While there may be some signs of improvement on the horizon, casual dining restaurant sales continue to slow "due to the slumping economy as consumers attempt to cut costs," says Marcus & Millichap. "The extended decline in restaurant sales has led to greater caution among lenders and investors, driving a 25% drop in transaction velocity thus far in 2009….The median price has slipped 17% year over year to $232 per square foot."

According to Marcus & Millichap, overall investment activity for single-tenant retail properties declined 45% through the third quarter as compared to the year prior; part of the reason has been a decline in 1031 exchange sales as well as sale-leasebacks, it says, and reduced transactions in those categories "should drag on investment activity through the first half of 2010." Further increases in cap rates, though, "ultimately will move some sidelined buyers into the market," it adds. "Soft demand for lesser properties with at-risk tenants will remain weak through 2010, however, as investors and lenders will be hesitant to acquire or finance assets with a greater likelihood of going dark."