CHICAGO—The “death of retail” has now been announced many, many times, but its demise never seems to happen. There is certainly a lot of turmoil, largely due to the competition provided by e-commerce, but investors remain quite interested in many portions of the sector, especially for single-tenant and small multi-tenant commercial properties. In fact, cap rates for these categories have been stable throughout 2016 and 2017, according to a new national report from Chicago-based Quantum Real Estate Advisors.
“For individuals who bought and sold single tenant deals, it was business as usual during this time,” the firm says. Cap rates did fluctuate from quarter to quarter, but by the end of September, the market was essentially in the same place it was last year at this time. On average, single tenant properties traded at 6.18% in the third quarter.
But buyers have become somewhat more risk averse. “The market saw changes in interest rates and banks deleveraging, making it more difficult to get financing on a variety of asset classes,” the firm says. “Buyers are not purchasing extremely low cap rates in the same volume as in previous years.”
Still, overall the tax benefits and passive income provided by single tenant properties will keep 1031 exchange buyers interested in the sector, Quantum adds. And the more risk averse attitude will lead to a bifurcation of the market, with buyers putting more of their dollars into properties with longer lease terms, better credit tenants and in dense urban locations.
The changes in cap rates over the past year were not uniform across the nation. Buyers in the West changed their focus from dollar stores, quick service restaurants and pharmacies to primarily pharmacies and casual dining restaurants, and sent average cap rates in the region from just over 5.2% to more than 6.0%, a jump of 81 bps, Quantum says.
During the same period, properties in all other regions experienced a modest decline in cap rates. In the Midwest, for example, buyers did a similar switch from dollar stores, QSRs, and pharmacies to pharmacies and casual dining, but cap rates in this region declined to about 6.4%, a drop of 24 bps.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
