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
bill.rose@marcusmillichap.com
■
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
john.chang@marcusmillichap.com
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.