Gas Stations, Casual Dining Win Over Buyers

Though net lease retail assets will be a harder sell this year than they have been in years past, investors are far from ready to write off the entire category, according to Marcus & Millichap Real Estate Investment Services Inc. In a new report, an advance copy of which was obtained by CPN, Marcus & Millichap projects that many net lease investors will focus on fast food restaurants and gas stations, as well as distressed assets in all categories.During a time when net lease retail asset prices have generally stayed flat or dipped, asset values in some categories have been increasing. Median prices for convenience stores/gas stations edged up toward $550 per square foot last year, even as cap rates were rising 80 basis points to slightly more than 8 percent. Falling gas prices have actually helped gas station operators by encouraging customers to buy additional, higher-margin items. “As profitability among operators continues to accelerate, (gas stations) will likely remain a preferred choice among investors,” the report explained.One far-reaching market trend will affect 1031-exchange sales. Higher vacancies and tighter lending standards are making it more difficult for investors to dispose of the apartment properties that often figure into 1031 exchanges. Marcus & Millichap also expects many a seller to place smaller assets on the market and pursue one or two larger properties in an effort to simplify management responsibilities. Drugstores have been especially popular among 1031-exchange buyers, so a reduced number of investors likely means more inventory on the market, lower prices and fewer exchanges involving drugstores, Marcus & Millichap reported.Fast food restaurants are still popular among investors, but buyers are getting choosier. “As with many other property types, investors are favoring urban properties in primary markets, where population density is supporting demand,” the report noted. Assets in secondary and tertiary markets are faring less well. Median prices per square foot leveled off from more than $500 four years ago to the low $400-per-square-foot level in 2008. In the casual dining category, activity will cool, but affordability and mid-7 percent cap rates will draw investors.Not surprisingly, big-box properties are taking the sharpest blow so far among net lease properties. The steep decline in consumer spending on electronics is a major culprit. Worries about big-box market value drove down pricing from $90 per square foot in 2007 to a little more than $70 last year. A dearth of candidates to backfill the 15 million square feet left behind by Circuit City and additional space from other big-box chains will make many buyers reluctant to acquire those properties, the report predicts.