Economy Watch: Single-Tenant Retail Accounts for Most Sector Growth

Certain retail sectors are seeing more development, such as single-tenant structures.
*Through first quarter. Credit: Marcus & Millichap's Net-Leased Retail Research report for Q2 2016.

*Through first quarter. Credit: Marcus & Millichap’s Net-Leased Retail Research Report, Second Quarter 2016.

Retail’s been the poor stepchild of the recovery in real estate, especially when it comes to development. There’s some demand for multi-tenant space, especially at the higher end of the scale, but not enough to spark a major new wave of development in most sectors. Under the radar, however, certain retail sectors are seeing more development, such as single-tenant structures.

That’s the main takeaway of Marcus & Millichap’s Net-Leased Retail Research report for Q2, which was released on Thursday. Overall, the report noted, positive economic momentum has tightened retail vacancy without sparking significant construction. “To address limited space availability, retailers have been working with developers to expand the pipeline of single-tenant floor plans, with deliveries topping 39 million square feet in 2015, accounting for the vast majority of retail completions,” the report explained. Restaurants and bars are leading growth in this subsector of retail.

Moreover, there’s an increasing amount of demand among investors for single-tenant retail properties. Some of that demand is being fueled by a generation of owners trading out of other assets via 1031 exchanges. Property owners nearing retirement are often electing to divest themselves of more management-intensive property types, especially apartment buildings (which are popular themselves among other investors for other reasons). A single-tenant retail property can have the advantage, from a retiree’s point of view, of providing income with very little effort.

Although cap rates for single-tenant properties are likely to remain stable due to the tight spread between credit financing and prices, willing investors continue to search for attractive offerings, Marcus & Millichap reported. “With several states considering more stringent definitions of like-kind exchanges, potentially limiting where acquisitions can be made, the current demand for net-leased properties remains robust.”