Grocery Rules Single-Tenant NNN

LOS ANGELES—Grocery is the new “buzz word” for single-tenant investors, who are willing to take on the risk of a big box retail space for a grocery tenant, according to Chris Sands, the founder of Sands Investment Group, and Dan Hoogesteger, principal at Sands Investment Group. The firm recently sold four single-tenant grocery stores in two separate transactions that totaled $47 million, GlobeSt.com has learned exclusively. While the sales show the investor appetite for grocery-occupied single-tenant properties, they also show that sellers are recognizing the market conditions and taking advantage of the good timing.

“People have really turned to the daily needs concept, which includes food, prescription drugs and things of that nature, and grocery stores fall under that category of daily needs,” Hoogesteger tells GlobeSt.com. “A lot of investors believe that it is a subsector within commercial real estate that has a much less likelihood of becoming obsolete with technology.” The four sales include a Food 4 Less single-tenant building in Stanton, CA, which traded for $18.5 million between private investors Katella 111 Partners and Safco Capital Corp. The second transaction was a three-property portfolio sale that traded hands for $28.6 million between an unnamed REIT and Ladder Capital Finance. Hoogesteger and Sands represented the seller in both transactions.

In the Food 4 Less sale, the owner looked at the market conditions and decided to sell the asset and move the capital into multifamily, an asset class with which he and his partner are familiar. “He recognized the risk of potentially owning this asset for the remaining base term,” Sands tells GlobeSt.com. “It is an 81,000-square-foot box, and if it goes vacant, based on the rent that they are paying, there could be a scenario where he is trying to back fill this property. We were able to show that his market was allowing for a cap rate where he could redeploy the equity that he had built up in this asset into another opportunity.” The owner purchased two multifamily properties with the proceeds from the sale, and has almost doubled his cash flow by making the move.

Similarly, in the portfolio transaction in Oklahoma, the seller felt this was the perfect time in the market to dispose of assets that weren’t characteristic its portfolio. In this case, the REIT owns grocery-anchored shopping centers, not single-tenant grocery. “They decided that it would be beneficial to show the market that they are only grocery-anchored owners and that they don’t mix into different categories. As a result, they decided to sell off everything in their portfolio that doesn’t fit directly into the category of grocery-anchored shopping centers,” says Hoogesteger. “We are seeing this more and more in the market right now. These are groups that might not necessarily be sellers, but for one reason or another, if they have a reason to sell, they are looking at the market and saying, ‘now is the time.’”

There were some challenges, however, with the transaction, namely that the leases were flat through the option period. “That was a hard challenge because a lot of buyers out there have a hard time swallowing the pill of buying a property that they are never going to have increases on for 17-18 years, in this case,” says Hoogesteger. Additionally, the properties were located in secondary markets, and although the sales were strong, the location ruled out institutional buyers. “The benefit of these is that they had a higher yield than a other types of single tenant retail, like a Walgreens property, for example,” Hoogesteger adds. Even with the challenges, the brokerage team still received double-digit offers for the sale.

In both of these transactions, the sellers don’t typically dispose of assets. Sands explains that in many cases with grocery anchored retail, the company approaches owners when they see an opportunity. “The product type specialization that we have within the firm to where we have groups working in specific niches, we are finding that is creating opportunity,” says Sands. “It is approaching them and creating a dialogue and showing the value opportunity if they trade money out.”