Page 10 — Retail Properties Quarterly — February 2021 A pproaching the one-year mark of the pandemic, com- mercial real estate invest- ment is in an odd position. Businesses we’ve always relied on to be sound, such as res- taurants and fitness centers, are hanging on by a thread, and busi- nesses that traditionally have been sought after in net lease, like con- venience stores and drugstores, are considered “essential” and are even more attractive today. For those interested in investing in commer- cial real estate today, the histori- cally underappreciated net-lease market is thriving and is predicted to grow significantly in 2021. Within the net-lease sector, a triple-net lease is a lease in which the tenant is responsible for struc- tural maintenance, general repairs, property taxes and insurance costs. Generally, net leases are long term and can range from five to 25 years, making the cash flow to investors fairly predictable. The value of a net-leased asset is dependent upon three main variables: lease struc- ture, credit of the tenant and the quality of the real estate. Net lease currently is one of the bright spots of the larger commercial real estate market, especially in the state of Colorado, which has seen growing interest from out-of-state investors. According to our proprietary data- base, there were 2,932 single-tenant net-leased properties on the mar- ket nationally, with an average cap rate of 6.19% and average remain- ing lease term of 10.7 years as of Jan. 22. In Colorado, there are just 48 properties on the market with the average cap rate 5.75% and the average remain- ing lease term 12.8 years. Lack of supply and ris- ing demand for net-leased assets in Colorado have compressed cap rates, especially within the “essen- tial” business seg- ment. The net-lease landscape in Colo- rado currently is dominated by the “essential” busi- ness category with convenience stores (41%), drugstores/pharmacies (14%) and quick-service restaurants/ fast food (11%) combining to make up 66% of on-market net-leased retail properties in the state. The top three tenants on the market in Colorado based on the percent of total available inventory are Kum & Go (19%), 7-Eleven (15%) and Wal- greens (13%). Nationally, 7-Eleven real estate has been one of the largest benefi- ciaries of the flight to quality with cap rates dropping dramatically. From December to January, ask- ing cap rates dropped from 4.95% to 4.89%. Looking back even fur- ther to January 2020, we found the average asking cap rate nationally for a 7-Eleven property to be 6.4%. This was partially due to the aver- age lease term on those properties being less than it is today. However, much of this can be explained by investors shifting focus to high- quality assets that are perceived as low risk. The 7-Eleven located at 3500 High- way 52 in Frederick is a great case study on the cap rate compression we’ve been tracking. In April, less than a month after most of the country was placed under stay- at-home orders, we were hired to represent a family office group that was outside of the state of Colo- rado. The group was looking for a long-term net-lease investment for a 1031 exchange that could weather the uncertainty brought on by the COVID-19 pandemic. After sifting through thousands of potential opportunities, we narrowed the search to essential businesses in Colorado. We were able to success- fully negotiate a purchase price of $3.99 million, reflective of a 5.2% cap rate. This particular 7-Eleven is located just off of Interstate 25, which sees a traffic count of around 123,000 vehicles per day. The 2.1-acre property features a 3,499-square-foot convenience store, 12 gas pumps and a separate diesel fuel island. For the next few months, we closely monitored market condi- tions and saw the average asking cap rate decline for similar assets. In October, we brought the property back out to market. After just a few weeks of marketing, we were able to generate multiple offers and ulti- mately find another 1031 exchange buyer from California, selling the property for $4.35 million with a 4.77% cap rate, a 44-basis-point dif- ference in the acquisition cap rate. We saw a common theme among prospective buyers. Many were pri- vate individuals from California or New York seeking net-lease invest- ments in Colorado. Investors from historically booming metropolitan Colorado is being flooded by net-lease demand Investment Market Hayden Salvas Associate director, B+E Net Lease, hsalvas@ A 7-Eleven located at 3500 Highway 52 in Frederick showcases the cap rate compres- sion, as the property was sold twice in a matter of months and the latter sale saw a 44-basis-point difference in the acquisition cap rate. Please see Salvas, Page 21