CREJ

Page 8 — Retail Properties Quarterly — November 2021 www.crej.com Market Update A National General Contractor With a Local Presence Since 2005 www.scheinercg.com 2 021 is on pace to be the most active year since 2016 for single-tenant net lease retail transactions both in Colorado and nationally. Through the first 10 months of this year, there have been 473 STNL retail properties sold in Colorado and 18,207 sold nationally, accord- ing to CoStar. While transaction volumes are up significantly com- pared to the past few years, STNL retail cap rates are at historic lows. The STNL market in Colorado and nationally is facing a supply and demand imbalance. The robust demand for STNL retail properties has created an extremely competitive environ- ment for buyers. Competition is fierce among highly motivated buy- ers such as 1031 exchange inves- tors, public and private real estate investment trusts, and high-net- worth investors seeking advanta- geous depreciation schedules. Historically, 1031 exchange inves- tors have sought STNL properties to defer capital gains taxes due to their stable long-term pas- sive leases. Over the past several years, public and private REITs have raised considerable capital to acquire STNL properties. Due to compressing cap rates, many have lowered their yield thresholds and are now com- peting with 1031 exchange inves- tors and high-net- worth individuals to deploy their capital. They are offering quick all-cash trans- actions and, in some cases, outbidding individual investors. Lastly, there are many investors looking to acquire STNL properties with accelerated depre- ciation schedules, such as gas sta- tions, car washes, collision repair centers and lube centers. Some of these property types can allow an investor to take 100% depreciation in year one. The supply of available STNL properties in Colorado, and nation- ally, is low and insufficient to sat- isfy the immense current demand. In particular, there is a shortage of top-tier STNL properties – those featuring locations in major metro- politan statistical areas, long-term leases, investment-grade credit, new construction, etc. The short- age of new construction proper- ties with long-term leases can be attributed to COVID-19-related development challenges and slowed expansion plans of many retailers due to market saturation with existing stores. Additionally, there are fewer retail sale-lease- backs currently due to extensive sale-leasebacks that occurred in the past several years. Because of the limited supply of STNL properties on the market, many transactions are occurring off market. Buyers and brokers alike are actively pursuing off- market opportunities and tapping into their networks to deliver STNL deals. By example, a considerable percentage of recent transactions facilitated by our firm have been off market. Given the current market con- ditions and historically low cap rates, many savvy STNL investors are selling challenging properties. Because of the limited availability of top-tier assets, less desirable STNL properties (such as short- term leases, secondary markets, noninvestment-grade credit, etc.) are trading for aggressive cap rates. This supply and demand imbal- ance plaguing the STNL market has created extremely competitive con- ditions nationally, but especially in Colorado. It’s not uncommon to receive more than 10 offers within the first few days of marketing. Properties are being awarded to buyers that are all-cash and able to quickly close. For example, we recently sold a brand-new construction U.S. Postal Service property in Castle Rock, where we received over 25 qualified offers and the property sold for 106% of the listed price. It traded for the second-lowest cap rate ever record- ed for a USPS property (excluding California), according to CoStar. The anticipation for 2022 is a continuation of the current market conditions. Investors will continue to aggressively pursue STNL retail properties due to their passive leases and stable income. Fiscal policy changes and rising inter- est rates remain great unknowns that certainly will impact the STNL retail landscape in 2022. STNL investors will be carefully monitor- ing each. s zach@bluewestcapital.com Extraordinary net lease demand drives competition Zach Wright Director and partner, Blue West Capital Single-tenant net lease retail sales for the first 10 months of this year as well as the first 10 months and total sales for the previous four years, according to CoStar