A year ago, we contributed to a Western Investor report on what was attracting tenants to single-tenant investment property; namely, strong covenants, long-term triple net, or even quadruple net leases, quality locations, and carefree ownership. Today, a lot of the fundamentals remain the same but what has been notable over the last few months is the increase in buyers and the amount of capital searching for these deals.
In a year that has brought uncertainty and risk to the forefront of people’s minds, as well as the shakeout of smaller local retail operators, stability and security are in high demand.
Many single-tenant properties are occupied by national tenants with strong corporate brand recognition and offer daily needs, such as banks, pharmacies, quick service restaurants, or automotive gas stations and service centres. These tenants often have a large loyal following and provide goods or services that are not easily replicated by e-retail.
Of the 23 deals firmed up or sold this year by Marcus & Millichap, seven were in Metro Vancouver, eight on Vancouver Island and the Interior of B.C., and eight in Alberta, for a combined value of over $104 million.
Assets in the Lower Mainland or primary markets on Vancouver Island and the Interior of B.C. received the highest level of interest, but this is also reflected in capitalization (cap) rates. In general, we have seen lower cap rates this year than in previous years. The greatest demand and lowest cap rates we received were for assets in Metro Vancouver, but the larger Vancouver Island and Okanagan markets were not far behind. Alberta, given the opportunity for slightly higher yields, drove increased investor demand.
Lenders are looking to these assets as a safe investment, and buyers have taken advantage of the competitive lending rates and terms. That said, investors are also coming to the table with greater equity across the capital stack. For transactions in the Lower Mainland, it’s common for buyers to expect to be putting down 50 per cent to 60 per cent equity given the low cap rates. Values in Metro Vancouver assets are often driven by the underlying land, promoting compressed cap rates.
In Metro Vancouver, buyers are speculating on the continuing increase of land value, and upward pressures on rents. As investors move away from the major population centres, the focus shifts to capturing the greatest positive leverage possible (the spread between cap rates and borrowing rates), with the more traditional loan to value ranging from 65 per cent to 75 per cent.
With a lack of investment product, and an abundance of capital, investors that were traditionally not focused on stratified commercial real estate opportunities, are now actively pursuing these assets. If you are looking to invest in the larger urban centres, stratified commercial assets will inevitably form a part of the overall portfolio.
Case in point, in North Vancouver, our team listed a block of newly built, street-front commercial strata units occupied by quality tenants including Scotiabank and Pharmasave. The strata units were being offered on an individual, single-tenant basis, all secured by long-term triple-net (NNN) leases with expiration in 2030-2031. Prices ranged from $1.4 million to $4.3 million. Within days of the properties going to market, a single buyer purchased the entire offering.
There are still traditional freestanding single-tenant opportunities in Metro Vancouver, but their scarcity, future development potential and often high-profile locations generate great interest and buyer demand.
We expect demand for single-tenant properties to remain strong through 2022, as capital continues to seek secure and stable hard assets. A rising interest rate market may push some groups to the sideline, but more likely to search further afield in secondary and tertiary markets. In general, the high demand for well-located, long-term, secure, and stable real estate will continue to apply downward pressure on cap rates in the immediate term.
- Curtis Leonhardt is first vice-president, investments, with Marcus & Millichap, Vancouver