Multi-Tenant Retail

Northmarq’s investment sales team has announced the addition of Michael Zimmerman as Vice President – Commercial Investment Sales. Zimmerman specializes in the disposition and acquisition of single tenant and triple net lease retail properties, further expanding Northmarq’s commercial investment sales. With over 20 years in the commercial real estate business, Zimmerman has been involved in over $1 billion of sales for shopping centers, single tenant, strip centers, office buildings and land deals. Prior to Northmarq, Zimmerman served as principal owner at Ground & Space. He has also served as a partner at Atlantic Retail Properties and a managing director at Calkain Companies. “I am thrilled to join Daniel Herrold’s team and Northmarq’s rapidly growing investment sales platform,” said Zimmerman. “Providing best in class data and the ability to leverage our debt and equity services are just some of the ways we can bring more value to our clients.” In his new role, Zimmerman joins the commercial investment sales team led by Daniel Herrold, Senior Vice President of Northmarq’s Tulsa office. Zimmerman will be based in Chapel Hill, North Carolina, and brings his expertise to support merchant builders, private owners and institutional clients with their retail investment needs. “I’m excited to have Michael join our team,” said Herrold. “Michael is a veteran in the net lease space having over 20 years of experience in the business. We needed to fill a void in our team of focusing on retail investors and developers throughout the Southeast, and Michael fits that void perfectly with his existing clients and business activity.” Zimmerman is a graduate of San Diego State University and holds a broker’s license in North Carolina and Florida. He is also a long-time member of the International Council of Shopping Centers.

Originally published by GlobeSt Cap rates in Q1 2023 represented the highest levels since Q3 2020 for both the single-tenant retail and office sectors, according to a new report from The Boulder Group. Decreasing transaction volume for the greater real estate market continues to limit 1031 exchange buyers transitioning into net lease properties, it said, as cap rates in the single tenant net lease sector increased for the fourth consecutive quarter within all three sectors in Q1 2023. New construction properties with recession-proof tenants including 7-Eleven and McDonald’s represent some of the lowest cap rates in the sector. “However, these tenants are not immune to upward cap rate pressure,” according to the report. “In Q1 2023, cap rates for new construction 7-Eleven and McDonald’s properties increased by 35 and 15 basis points, respectively. Furthermore, the spread between asking and closed cap rate increased for all three asset classes.” The spread rose to 30 basis points for retail, 40 for office, and 27 for industrial, according to the report. “Investors will continue to follow the Federal Reserve’s monetary policy,” The Boulder Group writes. “Investors largely believe there will be an end to the larger rate increases, of 50 basis points or more, in the near term.” Transactions will be driven by low leverage or all cash 1031 buyers for the highest quality product, The Boulder Group said. “However, given the overall uncertainty in the broader real estate market, the depth of the 1031 buyer pool will be limited when compared to historical standards.” Lower-Credit Assets ‘Back Where They Should Be’Mike Philbin, Northmarq senior vice president, tells GlobeSt.com that “we are closely approaching the one-year mark of when we started to see the peak of the net lease investment market fizzle away. “Due to the repeated interest rates hikes, this was inevitable. However, not all net assets had as drastic of CAP rate shifts. The higher-credit, investment-grade tenants have had a maximum of 50 bps upward movement in this time. “The lower credit, smaller franchisee, in tertiary market tenants have seen closer to 150-200 bps. We did have a very frothy net lease investment market moving into Spring 2022. But relatively speaking, the lower credit assets are back where they should be and the investment grade net lease assets are back to the 2018-2019 range, which was a strong market.” Price Maximization Especially Difficult for Larger Transactions Alex Sharrin, senior managing director, JLL, tells GlobeSt.com that investment momentum persists for performing retail that can be acquired with positive leverage. “The net lease market sits at the crux of real estate and credit, but intrinsic fundamentals are trumping credit amidst volatility,” he said. “Private capital continues to lead the bidder pool for NNN assets across the country and is often winning deals due to the unleveraged nature of the capital/underwriting. “Capitulation has been faster than expected for liquidity and re-investment.” Sharrin said price maximization has been especially difficult for larger transactions (i.e. $75MM+). “Instead of making comparisons to early 2022, a more realistic pricing benchmark is 2018/2019 levels or, pre-pandemic and pre-stimulus,” he said. Transaction Volume Will Soon ‘Level Off’Ryan Butler, managing director and senior vice president, Northmarq, tells GlobeSt.com that investors across all commercial real estate asset classes have been paying close attention to the responsive actions of the Federal Reserve and US Treasury as they work to address the ongoing regional banking crisis and continue the fight to tame record-high inflation. “As a result of the swift actions taken by both bodies, we are starting to experience a broad expansion in capitalization rates across the Net Lease sector,” Butler said. “However, it is important to note that this cap rate expansion cannot be painted with a broad-brush stroke. Investors in our space are still seeking well-positioned industrial and retail assets leased to ‘recession-proof’ tenants and, as a result, still transacting. “We anticipate a leveling off in the downward trend in transaction volume through the end of the year as investors make sense of this changing market. Realizing that the net lease asset class will continue to be a safe and stable investment vehicle within the real estate sector.” Bid-Ask Gap Widening Eli Randel, COO, CREXi, tells GlobeSt.com that cap rates on closed net lease assets have risen almost 5% YoY with transaction velocity slowing as buyer demand has cooled because of macro-market conditions. “The segment a year ago was at parity between asking and closed prices whereas now sales are transacting below asking prices illustrating a widening of the bid-ask gap,” Randel said. With increases in interest rates, both costs of capital have increased, and similar alternative vehicles are now generating attractive yields (for instance a liquid “risk-free” savings account at Marcus has a 3.75% interest rate), Randel pointed out. “Yet, net-lease real estate still has many benefits to passive investors and remains historically active and strong. Net lease continues to attract 1031 buyers and real estate investors looking for good yields with future upside and often buying in cash. “While slightly less active, higher-yielding, and with more discriminatory underwriting of terms (largely term-length and credit), net lease remains an important category and a great investment product for many in today’s environment.” Stale Assets on the Market, Decreasing Inventories Geoffrey West, senior vice president, MDL Group/CORFAC International, tells GlobeSt.com that amid the historic pace of interest rate increases experienced over the past year, single tenant net lease sellers have been reticent to quickly meet the increased cap rate market expectations resulting in decreased transaction volumes, stale assets on market, and decreasing inventories of available product. West said specifically in the California, Arizona, and Nevada markets, multiple surveys of available fast-food STNL assets (excluding ground leases) conducted over the past year in conjunction with maintaining market positioning of existing listings indicate an overall increase in average asking cap rates from April 2022 to April 2023 from 4.1% to 4.7% and a significant decrease in the quantity and quality composition of the available assets. And within that survey, secondary and tertiary market locations in those states appear to be adjusting to a higher cap rate environment more quickly while primary and core market locations lag as they seek to maintain historical premium cap rate levels. “The recent restabilization of the US 10-year treasury rates around the 350bps level appear to have put reduced upward pressure on asking cap rates as surveys conducted in February 2023 and April 2023 only reflected a 10bps increase in asking cap rate,” West said. “While prospective buyers with 1031 Exchange motivations cannot acquire treasury note assets and those don’t enjoy the benefits and burdens of real estate ownership, the yields being offered in those financial instruments, especially short-term yields, are often superior to core location yields being sought by sellers.” West added that, as such, investors without 1031 Exchange motivations and flexibility may look to temporarily park monies in these alternative investments and benefit from the premium yields being offered by the inverted yield curve until Seller expectations and the current bid-ask spread tighten and transaction activity levels rebound. © 2022 ALM Global Properties, LLC. All rights reserved.

Originally published by GlobeSt Investors seeking higher cap rates are finding them in industrial spaces that serve manufacturing, according to a new report from CBRE. Although e-commerce-fueled bulk logistics space is the darling of the current cycle, manufacturing stimulates industrial space demand for both factories and warehouses. CBRE pointed to Austin, Phoenix, and Reno as areas that benefit from new factories and capital stock capable of building high-value goods. “Interestingly, high-cost California has expanded its manufacturing as it retains a competitive edge in producing aerospace, chemicals, computing equipment, and other extremely high-value goods,” according to its report. Los Angeles is a notable outlier, it said, reflecting its heavy exposure to lower-value sectors, such as garment making. The Midwest accounts for just over one-third of U.S. manufacturing employment, just ahead of the South. Manufacturing Tenants More Imbedded in the PropertyRob Gemerchak, vice president, investment sales, Northmarq, tells GlobeSt.com that net-leased industrial manufacturing properties remain a very popular asset class among experienced investors – particularly those whose underwriting considers the tenant’s use of the facility, their industry, the property’s infrastructure, and regional labor. “As opposed to some other asset classes, manufacturing tenants tend to be more embedded in the property due to their investment in process machinery and equipment, production lines, and use of a trained workforce,” Gemerchak said. “A successful manufacturing tenant is often more likely to renew a lease vs. relocate – due to the time, expense, and production challenges involved in a relocation.” Considering manufacturing facilities’ unique infrastructure that may include cranes, heavy power, reinforced floors, etc. – there is economic value in these systems which support and enhance the real estate investment, he said. “The tenant’s industry is also a factor that investors consider, as firms who are supplying growth industries such as computer and electronics, chemicals, pharmaceuticals, and automotive provide the strongest security,” according to Gemerchak. “Finally, the regional workforce that supplies the tenant’s operation is an important variable that investors consider. As onshoring and reshoring of the manufacturing base continue, industrial properties located in strong regional labor markets will continue to be considered very attractive as a long-term investment.” Economic Turbulence Might Have Inflated Cap Rates Shanti Ryle, CREXi senior content marketing manager, tells GlobeSt.com that overall, while the total sales comps for manufacturing buildings are trending down year-over-year (given overall pauses in activity due to rising interest rate/economic factors), valuations and transaction volume for manufacturing industrial properties are still on the rise. “There may be some pause in transaction velocity following pandemic-era construction delays and economic turbulence, and the delivery of multiple properties at the same time may have inflated cap rates, lowering total sales value in 2022,” Ryle said. Arizona, Texas, I-85 Corridor Ideal for Manufacturing Expansion Adrian Ponsen, national director of U.S. industrial analytics at CoStar Group, tells GlobeSt.com that labor shortages have been gripping most sectors of the U.S. economy since 2019, but because of an aging workforce, and a prevailing skills gap, manufacturing is one of the industries struggling most to grow and retain its headcount. “As a result, US regions doing best to attract both foreign and domestic in-migration including Arizona, Texas, and the I-85 corridor stretching through Georgia and the Carolinas, have had a huge leg up securing the largest manufacturing expansions in recent years, particularly those tied to electric vehicle and semiconductor assembly,” Ponsen said. “These are the locations where manufacturers feel most confident that local labor force growth will be strong enough to support staffing up new operations at scale.” © 2022 ALM Global Properties, LLC. All rights reserved.