Buyers are much more focused on creditworthiness rather than acquiring large groups of properties.
Right now, bigger isn’t necessarily better in net lease. During a COVID flight to safety, investors stayed away from portfolios. Those transactions decreased from 18% in the first quarter of 2020 to approximately 14.5% in the first quarter of this year, according to Marcus & Millichap.
M&M says buyers are much more focused on creditworthiness rather than acquiring large groups of properties. However, when it becomes apparent what retailers are surviving, portfolio sales should pick up.
Even if portfolios aren’t selling, prices are inching up. Easy access to capital and low-interest rates helped push the price of single-tenant properties up 0.7% nationwide. With investors targeting creditworthy tenants, the average first-year return dipped ten basis points to 6.1%. The spread between interest rates and cap rates is wide. In fact, M&M says purchasing a single-tenant property is among the strongest returns available.
“Going forward, single-tenant assets will remain a popular destination for investor capital as a hedge against inflation and an alternative to low-yield bonds,” according to M&M.
Investors should also flock to suburban properties, following the migration of Americans through the pandemic as they sought housing with more space. M&M says that increased traffic in single-tenant properties in those locations should attract buyers.
“Buildings with a drive-thru have performed well and are expected to receive steady traffic in the coming months as many residents remain hesitant to fully resume their activities until a larger percentage of the population is vaccinated,” according to M&M. “Additionally, more Americans are projected to live in suburbs over the long term as millennials enter the prime age to start families and move to less dense areas.”
At GlobeSt.’s Net Lease Spring event Revathi Greenwood, global head of data and insights at Cushman and Wakefield, shared a Redfin survey that indicated one-third of respondents would move to the suburbs if they could.
Looking at the last ten years compared to the next ten years, nearly every city seeing increased migration is a Sunbelt market, with the exception of Seattle. Dallas tops the list, followed by Houston, Phoenix, Miami, and Atlanta. The biggest losers in the migration are mostly Gateway market cities, like New York, Chicago, Los Angeles, and Detroit. However, Greenwood pointed to Cleveland and Memphis as being two cities to watch for inbound migration.
Randolph is a Multifamily Investment Sales Broker with eXp Commercial servicing Multifamily Buyers and Sellers in the Greater Chicago Area.