In fact, we see Chinese and Korean banks being aggressive in lending on the single-tenant properties. Case in point was a recent sale by Hook Retail Advisors of a Smart & Final grocery store to a Korean investor whose Chinese bank closed the $8-million purchase in approximately four weeks with no estoppel or SNDA (subordinate, non-disturbance and attorney agreement). The smaller single-tenant properties are popular for foreign individuals who wish to protect their gains, while establishing a “foothold” in American real estate. Single-family home buying for rentals in familiar communities to the Asian investor is also popular.

GlobeSt.com: Are there particular areas of the country where these investors like to put their money?

Hook: To my knowledge, foreign capital prefers to purchase properties in regions surrounding larger dominant cities, whether it's Los Angeles, New York, Chicago, Miami, Dallas, San Francisco, or others. However, I believe New York, Northern California, and the Greater Southern California basin garner a large share of foreign capital. A few reasons why are: the size, diversity, and performance of the economies in the individual markets; the current and projected growth of the “demographic plate;” and the volume of academic institutions in the regions which attract top-tier students from abroad, with companies in tow waiting for their graduation. Thus, universities are a driving force of the population and business growth, of which an increasing share is coming from foreign expansion and migration into the United States.

GlobeSt.com: Have we seen a difference in how US investors are targeting these assets?

Hook: Overall, we have seen a dynamic shift over the past 10 years from investors dabbling in tedious property management of apartment buildings, office buildings and larger retail centers to the single-tenant or two-to-three tenant prime, irreplaceable retail buildings, which perhaps are pad buildings located in front of Walmart, Costcoor lifestyle-entertainment centers.

We also see high interest in purely premium product with top-tier tenants at intersections within higher income cities and mostly “infill,” with literally no additional retail zoned land available, yet near dense housing, good public schools and freeway access to job centers. Case in point is a new three-tenant triple-net free-standing retail building in prime South Orange County, CA. Located at the on and off ramp signal to Interstate 5 and fronting the main corridor, essentially the gateway to the prestigious city of Mission Viejo and several neighboring cities, the property provides several advantageous features. These include diversity of income (three tenancies), stability (a mere 2% retail vacancy rate), minimal management (NNN leases on a new class A building), a hedge against inflation (annual rental escalations) and long-term value growth (the only shops building at the intersection, no additional retail land, $150,000 annual household income and a master-planned community). The majority of the eight offers received are from foreign investors familiar with the Orange County region. This type of property in premium areas of Southern California currently trades at a 4.5% to 5.5% capitalization rate and should continue to do so in 2015.

GlobeSt.com: Due to increased demand, are investors willing to take on tenants that aren't has high credit than they might have considered before?

Hook: The increased global demand, combined with the shortage of deliverable retail product, naturally points to more risk absorbed by the investor. Purchasers are considering single-tenant leases guaranteed by franchisees rather than the parent company; buying properties with local or regional tenants who have five, 10, or 15 units; but not a public or large company; and investors are utilizing the historic low interest rates to leverage once again and rationalize paying record-low capitalization rates and, conversely, exceedingly high price-per-square-foot values. Investors in general desire an “added value” component, but the majority are settling for 5% to 6% yields after debt service for class A, well located, top-tier tenanted retail product in Southern California and other major market regions.

GlobeSt.com: As a result of all of this, do you see the single-tenant retail sector overheating?

Hook: The single-tenant market should continue to flourish for some time due to the continued global demand for American commercial real estate, the great “generational transfer of wealth” which has been taking place in America and shall continue, and the actual tenant demand for new prototype formats and new concepts which continue to evolve and be introduced to the well-capitalized US economy. Tenants nationwide are being forced to look at their “box,” their platform, their store size, layout and locations. As such, there will be a continued demand from the tenants for new construction. Developers will be busy in redeveloping sites for the tenant demand for new structures. Also, the continued population growth and realignment, in large part from foreign migration, will propel tenants and developers to fulfill the needs of the ever-changing face of America and the birth of new communities. Lastly, while interest rates globally remain low, and the worldwide investor climate seeking after-tax yield, single-tenant real estate will continue to be a popular investment. Long-term leases with corporate-credit-oriented tenants will command the most aggressive pricing. The ability to offset income with depreciation, plus the monthly cash flow provided with long term low-interest financing, is quite attractive compared to the alternatives.