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Net Lease Investors Begin Looking at Class-B Retail Assets

The amount of retail assets for sale in the net lease market continues to rise, as owners of lower-grade properties attempt to capitalize on strong investor demand. In addition to new construction Walgreens and McDonald’s, brokers are starting to see Rite Aids and Best Buys on offer, as well as second-generation space. That doesn’t mean, however, all of those lesser-quality properties will trade.

A report from The Boulder Group, a Northbrook, Ill.-based real estate investment firm that specializes in the single-tenant net lease market, shows that the number of retail assets offered for sale in the first quarter of the year rose 19.6 percent compared to the fourth quarter of 2011, to 2,976. A large portion of those assets represents second-generation space, the report states.

The trend represents sellers’ belief that investors faced with a shortage of class-A product will eventually shift to lower-quality assets. While it’s not impossible to find a Walgreens in today’s market, those properties get multiple bids and end up selling at prices that are too high for some investors, according to Randy Blankstein, president of The Boulder Group. So if they find an asset with a lower credit rating in one of the top 15 MSAs, they may decide to go after it.

Even in secondary markets with distressed fundamentals, investors might now be willing to do deals, provided the price is right, says Nicholas Coo, senior managing director with Faris Lee Investments, an Irvine, Calif.-based retail advisory and brokerage firm. For example, Faris Lee recently picked up an assignment on a single-tenant property with a no-credit tenant in Central Valley, Calif. Within five months, the cap rate on the property compressed 125 basis points, Coo says.

“That tells me buyers are willing to overlook [distress] because they are chasing yield,” he notes.

Lower-quality assets in tertiary markets, however, may not garner much demand. To make acquisitions of class-B properties make sense investors may be looking for cap rates between 8 percent and 10 percent, says Gill M. Warner, senior director of investment sales in the Tulsa, Okla. office of Stan Johnson Co., a national commercial real estate investment firm specializing in the net lease market. Class-B and -C assets in tertiary markets might not be picked up at all, notes Blankstein.

“There is demand for those assets in major metros, but not a lot of demand for them outside,” Blankstein says.

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