7I’ve been writing about this topic for most of the last 18 months. There is very little supply out there of the triple net or absolute net, single tenant, national credit retail opportunities, and that is of course what everyone wants. And what is available gets highly competitive and results in multiple offers and stupid caps. The pension funds and REITS snatch these up within a couple days of becoming available.
The obvious question is what to do. First, lower your cap rate expectations. I perpetually chase 7-Elevens, Walgreens and CVSs for example. At the beginning of 2012, the average asking cap on an absolute net, single tenant, single parcel, corporate lease 7-Eleven with gas was around 6 ½ %. By the beginning of the second quarter it was down to 6 % cap. I’d have to say now that a 5 ½ % would be reasonable, plus I’m not talking about class A coastal markets either. These are secondary markets I’m talking about above. Coastal Los Angeles, San Francisco or Orange County would be a sub 5 cap.
Second, for better yield and slightly less safety would be to look at a slightly lesser quality tenant by maybe going to a S&P BBB or BBB- tenant.
Third, a large regional franchisee who has maybe a 100+ units. I would say that these can still be reasonably safe and still be an absolute net. However, remember what helps you the buyer with the acquisition will also hurt you come time to sell. It’s just the way a free market works.
Fourth, another option that can be a big pain in the ass would be multiple tenant. True your theoretical proforma cap can be 2 or 2 ½ points higher. Plus, there’s no such thing as absolute net in this product class even on iron clad triple net leases because someone still has to administer all of it. Plenty of this on the market though and with the right purchase in the right location for the right price, multiple tenant can make a worthwhile investment although you’ll have to work at it. Another advantage over single tenant is that if something does happen you generally won’t lose all your cash flow.
I too wish this was easy, but if it was everyone would be doing it and there would be no money left for anyone.