![New Whole Foods store at Casas Adobe Plaza, Tucson](https://realestatedaily-news.com/wp-content/uploads/2015/02/Casa-Adobes-1-150x150.png)
Demand for Tucson net lease investments was crazy strong in the first quarter of the year, being the highest for sales activity over the past three quarters. There were over $96 million in net lease sales activity this quarter, 70% of those were to Institutional buyers with strong appetites for the 6.5% average cap rate and median lease rates hovering around $22 per square foot triple net in the Tucson metro area, according to data collected by the Real Estate Daily News.
The top five sales this quarter were:
- Casas Adobes Plaza $46 million
- La Paloma Village $17.2 million
- Camping World $5.9 million
- Shops at Desert Springs $5.38 million
- Walgreens #4266 ,$4.4 million
This quarter also saw new retail construction at Las Plazas in Vail, a 17 acre retail and restaurant hub that broke ground in March.
There seems to be a significant imbalance between supply and demand however, something we spoke with Nancy McClure, First Vice President Retail Services at CBRE in Tucson, about. McClure had this to say, “Tucson is viewed as an attractive market for many investors as they look at our market and see higher cap rates than what they will find in the coastal regions of the country. In that, when a quality investment property comes on the market, there are often multiple offers. There is quite a thirst for retail investment product and there are few available in our market. I expect to see more retail investment product come on-line this year with a similar investor response to those properties.”
Net lease properties between $1 and $5 million with highly recognized tenant names are the most popular; they appeal to all buyer groups. The low price points allow small investors to purchase them with or without leverage and portfolios of small net lease properties give the large buyer, such as REITS and large Institutional buyers, credit and location diversification.
McClure told us the Single-Tenant Net Investment (“STNI”) with credit tenants are a hot commodity and the longer-termed leases seem to capture the best pricing. Each investor has their favored property type; there will be some who want to buy grocery-anchored centers, others prefer “value-add” properties and of late the power centers are coming back in favor with some investors, primarily REITS. Retail properties in the “core” of a community are always prized.
While attractive to many investors, every positive trend has a flip-side too. Low interest rates have an impact on stuff you own because return expectations have to be adjusted to take into account the new realities. At the same time, net leases having become a global business. US investors are looking at Europe as well as here and global investors are looking at properties in the US.
“Cap rates are based on credit-worthiness of the tenant(s), length of lease(s), the ability to replace rents, location, barriers of entry, etc. Cap rates often compress when interest rates are low—investors will often stretch on price when they can borrow money at the low interest rates we are seeing,” according to McClure.
“The properties that often struggle are those that are unanchored, non-credit strip centers located in the peripheral of town, or midblock, or in areas that no longer resonate with retailers. For these types, it takes the broker’s to help “tell the story” for the investors to understand how to transform the property, how to fill the spaces, and estimate timing to make the property viable to the marketplace. Some investors like the high cap rates of these, and can be patient and enjoy the challenge of the turnaround,” said McClure.
In conclusion, the market is rife with opportunity.