Peter Block
Chicago, IL— In contrast to the broader commercial real estate capital markets last year, net lease retail property demand in the US weakened and sales volumes fell sharply. Similarly, according to a recent Colliers International report, while the CRE markets saw stable-to-falling capitalization rates and positive price appreciation, capitalization rates rose modestly in the net lease sector as prices fell.
Some of this was due to the real estate cycle. “Sales volumes fell sharply despite a significant pickup in overall commercial property sales mainly because the market has been hot for so long, it simply had to moderate at sometime,” Peter Block, executive vice president of Colliers tells GlobeSt.com. However tThe primary cause was a rise in interest rates, he continues. Now that rates have dropped again “2019 looks really good,” he says.
The reason, of course, is that the net lease retail is highly interest-rate sensitive. Rising interest rates not only make acquisitions more expensive if financed through debt, but also makes bonds and other interest-paying investments more attractive, thereby reducing the demand for net lease retail acquisitions, Block explains.
Subsectors That Did Well
Of the major sectors tracked by Colliers, fast casual restaurants enjoyed the greatest pickup in volume attributed partly to three significant Chili's portfolio sales. Conversely, dollar store and drug store sales volume fell sharply, while quick-service restaurants were even with 2017's sales performance.
“Casual dining restaurants grew faster than quick service restaurants this past year but I think this idea is a little misleading. The fast casual sector has been suffering as people's dining habits change. In my opinion, the increase experienced in 2018 was exaggerated because it was coming off a low base,” explains Block.
Drug stores, for the most part, are maintaining their popularity and are adapting their products and expanding pharmacy services, which seems to be satisfying investors concerns about the impact of the internet.
Dollar stores seem to be picking up again, according to Block. Meanwhile, he adds, a declining level of consumer confidence could benefit auto parts stores if consumers reduce their car purchases and hold onto their cars longer, thus fueling the need for more auto parts purchases.
The report, nonetheless, sees continued vigor in US property markets on the strength of strong operating fundamentals and ongoing compelling property returns. The US economy is also outperforming every other advanced economy, making the US an attractive investment for investors. As for net lease retail, overall market conditions are favorable even though a return to the peak levels of 2015 appear unlikely.
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