RetailResearch N E T- L E A S E D O U T LO O K First Half 2012 National Retailers Adapt to Evolving Consumer Behavior As the demographics and consumer psyche of America evolve, national retailers are responding by re-conﬁguring expansion models and product assortments. The traditional dynamics of retail are ﬂuctuating and the lines that separate extreme-value stores, drugstores and big-box stores are becoming less evident. All retail segments are pressing for a broader consumer base, with dollar stores and drugstores selling groceries and value chains such as Walmart oﬀering pharmaceutical drugs in most of their locations. In addition, big-box chains are altering the layout of stores to inﬁll urban spaces in supply-constrained metros such as San Francisco and New York, posing new competition for dollar stores and drugstores. Concepts such as Walmart Express and CityTarget will average 15,000 square feet and provide a “one-stop-shop” experience for consumers in major metros. As standard-sized Walmart, Target, and Kmart stores close in suburban areas, health and ﬁtness and discount retailers will re-absorb much of the dark space left behind. Meanwhile, quick-service restaurants and auto-part retailers will beneﬁt from the thrifty frame of mind that lingers from the recession. Households cutting diningout expenses will opt for aﬀordable substitutes to sit-in restaurants, and enhanced menus will lure many families that previously sought out healthier alternatives. This frugal mentality spills over to the auto-part segment as companies and individuals attempt to extend the life of their vehicles and overcome debt burdens. With demand for single-tenant assets steadily increasing, and a dearth of investment-grade properties going on the market, buyer interest will shift toward assets with shorter lease terms or lesser tenants. Cap rates for the few top-tier assets that do trade are already low, minimizing the spread between yields and borrowing costs. The risk of inﬂation is deterring investors from the low-spread environment, as the devaluation of the dollar could outpace rent growth and diminish returns. In addition, property holders who purchased between 2005 and 2007 generally have negative equity, and only those with investment-grade tenants will be able to reﬁnance. Owners with less favorable tenants will be forced to bring properties to market and create ample supply for buyers searching higher yields. In fact, properties with franchisee and non-investment grade tenants yield 100 basis points to 200 basis points above corporate-backed assets. SINGLE-TENANT RETAIL MARKET OVERVIEW 8.5% cap rate down 70 basis points 4Q10-4Q11 Dollar Stores: A slow economic recovery will bode well for extreme-value retailers, as consumers continue to search for savings. The increased supply of dollar stores will meet the fervent demand from investors looking for credit-tenant properties with high yields. 6.7% cap rate down 120 basis points 4Q10-4Q11 Quick-Service Restaurants: Operations for national fast-food chains are strengthening, due primarily to heightened consumer interest as an alternative to expensive dining. Corporate-backed properties will garner the most attention, due to limited availability. 8.1% cap rate down 20 basis points 4Q10-4Q11 Auto-Part Retailers: As debt obligations loom, consumers will address deferred maintenance in lieu of purchasing new vehicles. A substantial threat from new car sales will likely take several years to materialize, as individuals revamp their credit. 7.7% cap rate down 10 basis points 4Q10-4Q11 Drugstores: The supply of drugstores will swell as retailers attempt to gain a foothold in the grocery market through expansion. High-credit assets will remain attractive to private and institutional buyers with minimal risk. 8.9% cap rate up 50 basis points 4Q10-4Q11 Big-Box Retailers: Major retailers will shy away from the suburban sprawl strategy that became so prevalent before the recession in order to focus on a more urban-growth model. As more individuals shift toward the core of major metros, investors will pursue the new scaled-down stores. DOLLAR STORES Extreme-Value Retailers Continue Large Expansion Efforts Median Price per Square Foot Average Cap Rate $120 10% $100 9% $80 8% $60 7% $40 Average Cap Rate Median Price per Square Foot Dollar Store Sales Trends 6% 07 08 09 10 3Q11 Sources: Marcus & Millichap Research Services, CoStar Group, Inc. Median Price per Square Foot Average Cap Rate $400 9% $375 8% $350 7% $325 6% $300 Average Cap Rate Median Price per Square Foot Quick-Service Restaurant Sales Trends 5% 07 08 09 10 3Q11 Sources: Marcus & Millichap Research Services, CoStar Group, Inc. Median Price per Square Foot Average Cap Rate 9% $250 8% $200 7% $150 6% $100 5% 07 08 09 10 QUICK-SERVICE RESTAURANTS Fast-Food Retailers Vie For Breakfast, Health-Conscious Markets As quick-service restaurants (QSRs) expand their product mix to cover a larger base of consumers, their operations will improve and support growth in new markets. In addition to their focus on healthy alternatives and value menus, fast-food chains are competing aggressively for a share of the breakfast-food market. The low marginal costs and increased revenue associated with breakfast products will prove to be vital to operations, as stores open the entire day outperform the competition. Quizons Sub, A&W Restaurants, and Burger King are among the top QSRs expanding in 2012, and much of their operational success can be attributed to their adaptation into the breakfast market. Meanwhile, health-conscious consumers will support the accelerated growth of Subway and Chipotle Mexican Grill, as the two companies plan to add 2,000 and 140 stores, respectively. While rising commodity prices could threaten proﬁt margins for healthy food oﬀerings, the scale of both companies will mitigate any major impact on store operations. Fast-food properties are garnering considerable interest from both institutional and private buyers, despite a shortage of corporate-backed leases. Transaction velocity has decelerated, and the median sales price has fallen 9 percent to $338 per square foot. Still, corporate-backed assets with short leases are likely to trade at considerably higher price points. These deals typically close with cap rates in the low-6-percent range, while franchisee assets yield 100 basis points higher. AUTO-PART RETAILERS Deferred Maintenance Fuels Auto-Part Retailer Operations 3Q11 Sources: Marcus & Millichap Research Services, CoStar Group, Inc. page 2 Average Cap Rate Median Price per Square Foot Auto-Part Stores Sales Trends $300 The prolonged eﬀects of the recession have transformed the psyche of consumers, propelling extreme-value retailers to the forefront of the retail market. As many households face signiﬁcant debt obligations, the thrifty mind set that was prevalent during the recession will persist as well. Dollar stores have beneﬁtted from lingering ﬁnancial instability and consistently outperform most retail segments. The increased consumer base encouraged dollar-store chains to drastically expand over the last few years, and national chains will continue this trend through 2012. In fact, Dollar General, Dollar Tree, and Family Dollar will open a collective 1,225 stores in 2012. Dollar General will lead the growth with 600 new locations, mostly in rural communities across the country. Due to their positioning in smaller markets, Dollar General stores are less likely to face competition from big-box retailers. The Dollar General model also favors freestanding locations, with nearly 60 percent of stores standing alone, versus less than 40 percent for Family Dollar. The credit associated with many dollar stores, along with the relatively high yields, is luring investors into the discount segment of single-tenant retail. Deal ﬂow hiked 42 percent year over year, inﬂuencing a 9 percent increase in median sales price to $102 per square foot. Retailers are expected to increase supply throughout the year, and buyers will act quickly to obtain ﬁrst-year returns in the mid- to high8-percent range. Auto-part retailers will post sales growth as consumers refrain from purchasing new cars and focus on maintaining older vehicles. Many individuals still lack the necessary savings or credit to purchase a new vehicle, and those who have exhausted the life of their older models will likely turn to used cars. Auto-part retailers such as O’Reilly Auto Parts and AutoZone have directly beneﬁtted from the maintenance Marcus & Millichap ◆ Single-Tenant Research Report DRUGSTORE Monthly U.S. Retail Sales, Excl. Auto, Gas $300 Retail Sales (billions) required on these older, used vehicles. In fact, O’Reilly Auto Parts charted yearover-year sales growth of 8 percent in the third quarter of 2011. AutoZone remains the industry leader, however, and will edge past competitors in store growth as well. AutoZone is expected to add 160 locations, while O’Reilly will open 150 new stores. Sales velocity for auto-part retail assets has decreased 13 percent since last year, yet median sales prices have grown nearly 8 percent over the same time frame. The rise in median price to $228 per square foot and compression of deal ﬂow is likely due to a limited amount of supply coming to market. Investors will be reluctant to sell assets with yields around 8 percent, especially as operations continue to improve. $240 $210 $180 Renewed Focus on “Brick-and-Mortar” Expansion Takes Shape 01 02 03 04 05 06 07 08 09 10 11* *Through December Sources: Marcus & Millichap Research Services, U.S. Census Bureau Median Price per Square Foot Drugstore Sales Trends Median Price per Square Foot Average Cap Rate $350 9% $325 8% $300 7% $275 6% $250 Average Cap Rate After tempering store openings and broadening online sales last year, national drugstore chains are expected to increase their brick-and-mortar presence in 2012. As Walgreens initiated their “Customer Centric Retailing” format, oﬀering groceries and other consumable goods in stores, other national chains witnessed the proﬁtability and shifted focus to in-store sales. The top drugstore retailers have found the expansion of their product assortment to be beneﬁcial to their bottom line, although the intrusion of some dollar stores into urban markets has cut some of those profits. As dollar stores become more common, national chains such as Walgreens and CVS Caremark will likely have to meet the reduced price points of extreme-value retailers in order to maintain the daily traﬃc that comes with consumable goods. In addition, drugstores will attempt to grow at a rate similar to dollar store expansions. Industry-leader Walgreens will set the pace of expansion with 350 new locations, at a 5 percent addition to the current store count. CVS is expected to increase their store count by 4 percent in 2012. Transaction activity has jumped 18 percent in the last 12 months, driven primarily by investors ﬂeeing the stock market for the less-risky net-leased drugstores. The continued expansion of deal ﬂow has elevated the median sales price 2 percent to $330 per square foot, and subsequently compressed cap rates into the mid-6 to low-7-percent range. As more of these assets come to market, buyers will bid aggressively to acquire these safety plays. $270 5% 07 08 09 10 3Q11 Sources: Marcus & Millichap Research Services, CoStar Group, Inc. BIG-BOX RETAIL Big-Box Retailers Transition to Smaller Formats in Urban Markets Marcus & Millichap ◆ Single-Tenant Research Report Median Price per Square Foot Big-Box Sales Trends Median Price per Square Foot Ave rage Cap Rate $200 10% $150 9% $100 8% $50 7% $0 Average Cap Rate Big-box retailers are restructuring their business strategy as the population continues to migrate from the suburbs to the core of major metros. With volatility looming in the housing market, an increasing number of individuals are transitioning to urban rental units near major employers for a “live-work-play” experience. In response, major retailers are rolling out scaled-down concepts such as CityTarget and Walmart Express stores, which are small enough to take up existing urban retail space. The stores will average 15,000 square feet and will be in predominantly large metros such as San Francisco, Chicago, New York, and Los Angeles. Meanwhile, Sears, Roebuck and Co. will shutter more than 100 Sears and Kmart stores that charted lackluster sales in suburban areas. As urbanization continues, other big-box retailers will have to address the necessity of adapting to the demographic shift. Investors are increasingly optimistic about the operations of big-box retailers, which is underscored by the 65 percent jump in sales. The median price, meanwhile, rose 14 percent over the past year to $123 per square foot. Despite the recent rise, the median price remains nearly 30 percent below peak levels, largely due to the volume of vacant assets changing hands. Meanwhile, assets with credit tenants also garnered attention last year, compressing overall cap rates to 8 percent. 6% 07 08 09 10 3Q11 Sources: Marcus & Millichap Research Services, CoStar Group, Inc. page 3 Capital Markets By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation Visit www.NationalRetailGroup.com or call: Bill Rose National Director National Retail Group Tel: (858) 373-3100 [email protected] ■ The yield on the 10-year Treasury held below 2 percent through the ﬁrst few weeks of 2012 and should remain relatively low throughout the year. A late-2011 statement issued by the Fed reinforces expectations for accommodative monetary policy to persist for at least the next 12 months, restraining interest rates. Furthermore, global investors seeking safety will continue to migrate to U.S. government debt, keeping yields low. ■ Nearly all types of lenders will compete for credit-tenant triple-net deals this year, with life companies, commercial banks and CMBS leading the charge. Conduit lenders generally oﬀer non-recourse ﬁnancing and higher leverage than conventional avenues, and will remain an important capital source for single-tenant investors in 2012. ■ Investors seeking loans for single-tenant properties occupied by local or regional chains will rely largely on community and regional banks. Lenders in this segment generally require at least seven years left on the lease term and place signiﬁcant weight on a potential borrower’s credit and balance sheet. ■ Strong competition for credit-tenant deals supports average loan-to-values of 65 to 75 percent, while lower-quality assets with less-creditworthy tenants often require equity of 40 to 50 percent, or more. On average, debt-service ratios range from 1.25x to 1.40x, but can fall to 1.04x with credit lease ﬁnancing. All-in rates for new singletenant loans start in the high 4 percent range for best-of-class assets with investmentgrade occupants, with lower-tier deals pricing 75 to 150 basis points higher. RECENT SALES HIGHLIGHTS Prepared and edited by Troy Causey Research Associate Research Services For information on national retail trends, contact John Chang National Research Manager Tel: (602) 687-6700 [email protected] Price: $150 © Marcus & Millichap 2012 www.MarcusMillichap.com Property Name LA Fitness CVS Staples Walgreens Chase Bank Walgreens IHOP Whataburger Burger King Pizza Hut Burger King Family Dollar Arby’s KFC Taco Bell Advance Auto City, State Hemet,CA Phoenixville, PA Fort Lee, NJ Rapid City, SD Plano, TX Miami Shores, FL Sierra Vista, AZ Scottsdale, AZ Tulsa, OK Kissimmee, FL Navarre, FL Greensboro, MD Glendale, AZ Shawnee, KS East Meadow, NY Suffolk, VA Sales Price $9,600,000 $8,458,085 $7,175,000 $5,025,000 $2,950,000 $2,900,000 $2,510,000 $1,800,000 $1,445,000 $1,214,000 $1,206,584 $1,125,000 $1,050,000 $939,000 $895,000 $710,250 Price per Sq. Ft. $192 $656 $559 $332 $705 $195 $557 $607 $475 $306 $255 $141 $363 $343 $643 $88 Cap Rate 7.71% 7.05% 6.96% 8.64% 5.73% 6.97% 7.25% 7.94% 7.75% 7.50% 7.49% 8.70% 8.43% 7.58% 7.85% 8.47% The information contained in this report was obtained from sources deemed to be reliable. Every eﬀort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, ChainStoreAge.com, CoStar Group, Inc., dollargeneral.com, economy.com, International Council of Shopping Centers, Real Capital Analytics, walgreens.com and walmart.com.