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The Big Dance Will End, But This Won't

Chicago Retail

We’ll hate to see March Madness come to an end in a couple weeks, but here’s a comforting thought. The skyrocketing values of retail net-leased properties show no signs of slowing.


The strong market and cap rate compression have been primarily driven by favorable interest rates, Stan Johnson Co director Tom Fritz says. The 10-year industry vet just joined the firm from Mid-America, where he was VP of the net-lease group. At the top of a wide range of buyers, the American Realty Capital Properties/Cole Real Estate Investments merger earlier this year created the largest public REIT out there buying single-tenant, net-lease retail properties, Tom tells us. (The Kimye of retail, if you will.) Other active buyers include smaller REITs, private family trusts, and ever-popular 1031 exchanges, where East Coast buyers are now more prevalent (demand historically comes from California).


New 20-year McDonald’s net leases are trading most aggressively, Tom says, at a 4% to 4.25% cap rate depending on the market. (They're so hot, you'd think they came with nuggets.) High-demand 20-year Walgreens net leases are commanding 5.25% to 5.5% cap rates. Beyond that, the market’s been clamoring for Sherwin Williams, Advance Auto Parts, and Dollar Stores. In constant flux these days, grocery is another sector to watch, he tells us. The Dominick’s exit gave other health-focused chains like Whole Foods (5.5% cap rate) a chance to gain a position in certain Chicago submarkets like the underrated (for retail) West Loop, and Tom’s seeing a similar musical chairs game around the country.


California may be net lease’s market leader, but a good urban location in Chicago is selling for comparable value, Tom (snapped with the DRESL crew and Lord Stanley) says. New York City, Houston, and Florida (with its lack of state income tax) also remain perennial favorites. A lack of quality supply makes it a sellers’ market, though new construction net-lease continues to pick up year-over-year (dating back five years), he adds. As long as banks keep lending, retailers will expand and the market should remain strong. In addition to his recent job change, Tom’s building a house and expecting his first child in June. How true that good things come in threes, but hopefully no surprise triplets here.