The Retail Investment Market is in Unprecedented Territory

by Katie Sloan

During the pandemic in 2020, there was a pause in the retail investment market once the stay-at-home orders were implemented. However, the single-tenant and multi-tenant retail pad properties quickly picked up momentum in the third and fourth quarters, but transactions for grocery-anchored shopping centers were relatively few. In 2021, the velocity of transactions for all retail product types, including grocery-anchored shopping centers, shifted into an unprecedented gear, particularly in the second half of the year. For example, Hanley Investment Group closed 90 deals in 90 days in Q4 2021 and finished 2021 with a record year — in both the number of transactions and total sales volume. And, the transaction velocity momentum has spilled over into 2022, as Hanley Investment Group is experiencing its busiest first quarter ever.

Today, there is still a significant amount of private capital and aggressive 1031 exchange buyers in the market and not enough supply, which is continuing to put pressure on cap rates. Private capital buyers (not in an exchange) who had previously sat on the sidelines during 2020 through late 2021, due to concerns about the impact of the pandemic on commercial real estate, have jumped back into the market. Often, these deals are within the single-tenant retail category, especially brand-new construction, drive-thru quick-service restaurants (including Starbucks Drive-Thru properties), convenience stores with gas stations (particularly 7-Elevens), express car washes, auto parts and services stores, childcare and learning centers and grocery stores. Institutional buyers are also back and very active in the market, selling non-core retail assets and/or purchasing core assets. Institutional quality grocery-anchored shopping center sales have been receiving an abundance of competitive bids, and, in some cases, above initial seller pricing expectations.

According to CoStar, 652 retail transactions (over $1 million) with an average cap rate of 5.56 percent were completed in California in 2020 compared to 1,000 transactions in 2021 with an average cap rate of 5.36 percent, representing more than a 53 percent increase in transaction volume from the previous year and a 20-basis-point decrease in the average cap rate.

With the increased number of investors and exchange buyers flooding the market, many investors are forced to “loosen” or “stretch” their criteria for retail properties. Hanley Investment Group is continuing to see this with both anchored and unanchored properties. Depending on the tenant and location, cap rates have compressed an estimated 25 to 50 basis points in the last six to nine months, specifically on single-tenant retail properties, and investors are so starved for quality product, that they have had to exercise maximum flexibility in their criteria. This means they have paid more than they previously wanted, accepted a lower cap rate, sometimes a shorter lease term, or a different tenant or location than they had initially targeted, etc. The record-high sale prices and all-time low cap rates in 2021 demonstrated that many investors were willing to pay a premium, especially within the time constraints of a 1031 exchange.

Car Washes

Hanley Investment Group is seeing an unprecedented amount of demand for single-tenant car washes as buyers sought to take advantage of the bonus tax depreciation benefits. Private investors are less focused on the car wash’s credit and more interested in the unit’s level of success. In Q4 2021, Hanley Investment Group closed 18 single-tenant car wash properties. These properties traded at a mid- to high-5 percent cap rate range for fee-simple express car washes and mid- to high-4 percent cap rate range for ground lease car washes. This marks a 75- to 100-basis-point compression over the previous 12 to 18 months. Hanley Investment Group has 12 more single-tenant car wash properties under contract or sold in Q1 2022.  

The U.S. car wash service market is expected to grow at a compound annual growth rate of 4.8 percent from 2021 to 2028 to reach over $20.7 billion by 2028. Car wash water statistics indicate that 66 percent of Americans get their cars washed approximately 13 times per year. This puts the average washes per month at one or two times.

Quick-Service Restaurants (QSRs)

Traditionally, there has been a discount for single-tenant fast-food properties with franchisee credit tenants versus corporate tenants, but, in the first quarter of 2022, there was virtually no difference in cap rates. As long as properties are located in great areas and have strong unit-level performance or are operated by experienced franchisees with multiple units, investors have been much more willing to accept less credit than in the past.

In the QSR sector, strong demand for single-tenant net-leased properties with a drive-thru pushed cap rates to historic low levels. For example, at the end of October, Hanley Investment Group completed the sale of a 3,040-square-foot, single-tenant Panda Express with a drive-thru on 0.77 acres in Perris, California, and closed at a cap rate of 3.47 percent, a record-low cap rate for a Panda Express nationwide.

Hanley Investment Group also saw that ground leases (land leases) became more in favor in 2021 than they used to be, and these cap rates have also compressed. For example, in late December, Hanley Investment Group arranged the sale of a new construction, single-tenant Chick-fil-A at Monterey Crossing in Palm Desert, California. The 4,738-square-foot Chick-fil-A building with a double-lane drive-thru sits on 1.63 acres. The store is scheduled to open in the first half of 2022. The sale price was $7,246,000 for the absolute triple-net ground lease, which represented a record-low cap rate of 3.45 percent. Hanley Investment Group procured a buyer on a pre-sale basis, closing escrow prior to completion of construction and tenant open for business and paying rent.  

In the last 24 months, Hanley has sold or has in escrow 32 Starbucks properties across the U.S., many at record pricing. In 2021, Hanley Investment Group arranged the sales of 16 Starbucks Drive-Thru and Cafe investments valued at $61 million, most at historic record pricing. In Orange County, California, Hanley Investment Group generated 20 offers and selected an all-cash, non-1031 exchange buyer based in Southern California for a rare, 20-year Starbucks ground lease for a new, 895-square-foot drive-thru-only Starbucks in La Palma, California. The sale, which represented a cap rate of 3.27 percent in August 2021, set a new, all-time record cap rate for a single-tenant ‘drive-thru-only’ Starbucks in the U.S.

In Los Angeles County, Hanley Investment Group arranged the sale of a single-tenant, 2,014-square-foot Starbucks café with a drive-thru in Redondo Beach, California, in early December 2021, and achieved $3,563 per square foot, record pricing for a single-tenant Starbucks nationwide over $7 million.


Convenience stores with gas stations such as 7-Eleven continue to be one of the most sought-after retail investments. 7-Eleven is one of the largest, most successful retailers in the U.S., and the company’s operating success as an essential business during the pandemic further accentuates the attractiveness of this investment grade tenant. Hanley Investment Group has sold 34 7-Eleven properties in 36 months including 13 single-tenant 7-Eleven properties totaling $60 million in 2021. In early December, Hanley Investment Group completed the sale of a brand new 7-Eleven with a gas station in Santa Rosa, California. The sale price was $8 million, which represented a national record-high selling price for a 7-Eleven and a record-low cap rate of 4.37 percent. Hanley Investment Group expects sales activity for single-tenant 7-Eleven net-leased investments will stay strong in 2022.

Childcare and Learning Centers

Single-tenant net-leased properties occupied by a childcare or learning center like Kiddie Academy or The Learning Experience have seen a cap rate compression between 25 and 100 basis points over the last 18 months. Even with the cap rate compression, childcare-leased properties in certain markets still offer a relatively attractive return for investors that need to get positive leverage financing. New local banks and credit unions have entered the market and it is much easier to procure financing today than in the past. Enrollments are critical as is having an operator with considerable experience. The childcare industry is a $57 billion industry and is forecasted to reach $62.1 billion in the next five years. One in three
families spends 20 percent or more of their annual household income on childcare. In the last 10 months,
Hanley Investment Group has arranged the sale or has in escrow of 13 single-tenant properties leased to childcare and learning center
tenants including The Learning
Experience, Kiddie Academy and O2B Kids!

Auto Parts and Service 

Investors continue to have a high level of confidence in the auto parts and repair industry and many of the quality properties that we are seeing like AutoZone, O’Reilly Auto Parts and Caliber Collision remain in high demand, representing a flight to safety for many single-tenant private investors. Other auto service-related tenants, such as Valvoline and Jiffy Lube in the oil change space, have also been a great alternative to traditional net-leased retail. In mid-September, Hanley Investment Group implemented a pre-sale marketing strategy for a new AutoZone ground lease in Big Bear Lake, California, and procured an all-cash 1031 exchange buyer that closed escrow three months prior to completion of construction and tenant opening for business. The sale represented a cap rate of 3.75 percent, a record-low cap rate for the U.S.

Service-based, internet-resistant assets like auto parts and auto service centers are recession-proof as consumers use and extend the life of their automobiles instead of purchasing a new car during times of economic stress. They also do well during strong economic times because as new automobile sales climb, the total number of cars on the road increases. According to the Hedges Company, there were 286.9 million registered cars in the U.S. in 2020. The Automotive Aftermarket Network is optimistic that the sales of car parts and accessories will be worth $433 billion by 2021. Hanley Investment Group sold 19 auto repair and service center properties in 2021, valued at $56 million, and has closed or has in escrow another six auto repair and car service properties in Q1 2022.

Multi-Tenant Retail Pad Sales and Break-Up-Sale Strategies

There was no shortage of interest in high-quality, multi-tenant retail property, particularly in the last six months of 2021. Investors with 1031 exchange requirements have been starved for multi-tenant retail product that meets their criteria, scrambling in search of the right deal. The competitive environment has driven up pricing and resulted in record-historic pricing for many sales in 2021 and this market frothiness has carried over into the first quarter of 2022.

For example, Hanley Investment Group sold two multi-tenant retail properties totaling nearly 28,000 square feet near Highway 71 at the Grand Avenue entrance/exit in Chino Hills, California, for a combined value of over $19 million in early November. Hanley Investment Group generated many competitive and qualified offers on both Chino Hills Grand Plaza and Gateway Village and secured two separate Southern California-based 1031 exchange buyers at 100 percent of the asking prices for both assets.

In Orange County in mid-November, Hanley Investment Group arranged the sale of the Chipotle-anchored multi-tenant retail pad located at Foothill Ranch Towne Centre in Foothill Ranch, California. Foothill Ranch Towne Centre is a regional power center anchored by Walmart Supercenter, Target, 99 Cents Only, Hobby Lobby, JOANN, Michaels, Old Navy, PetSmart and Regal Cinemas. The sale price was $8.2 million, which represented a 4.58 percent cap rate, a record-low cap rate and a record-high price per square foot for a multi-tenant pad (three tenants or more) in South Orange County.

Hanley Investment Group also anticipates seeing more shopping center owners implementing a break-up-sale strategy to capitalize on the high demand for single-tenant and multi-tenant retail pad product. Owners continue to see the accretive value of selling individual parcels of a shopping center rather than selling the property as a whole. The value in implementing this strategy can result in up to a 100-basis-point spread in cap rates (or increased value) when selling the net-leased-occupied out-parcels or pads off separately. In 2021, Hanley Investment Group executed a break-up-sale strategy at nine major shopping centers in the U.S. and expects to bring at least 40 to 50 or more single-tenant and multi-tenant pad properties to the market in 2022 as a result of implementing break-up sale strategies at multiple large shopping centers.

In late December, Hanley Investment Group arranged the sales of two multi-tenant retail pad buildings as part of a break-up-sale strategy at Highland Village, a new Sprouts-anchored shopping center in Fontana, California. The two buildings, which totaled 13,515 square feet, closed at over $11 million, representing a cap rate of 5.00 percent. This transaction marks the eighth property Hanley Investment Group has sold at Highland Village, totaling a combined 61,123 square feet and approximately $40.8 million in sales, a record-high combined sales price and a record-low-cap rate for the sales.

In Palm Desert, California, Hanley Investment Group completed sales of four new construction retail pad properties at the newly developed Monterey Crossing shopping center at the Interstate 10 and Monterey Avenue interchange to four separate buyers at record-low cap rates. The combined value of these sales was approximately $20.3 million and included a single-tenant building occupied by a brand-new Habit Grill Drive-Thru (which closed in late February 2022 at a nationwide record-low cap rate) plus two new single-tenant ground leased pads to Chick-fil-A Drive-Thru and Quick Quack Car Wash, along with a two-tenant pad building occupied by AT&T and Spectrum, which closed in December 2021.

In the Greater Los Angeles area in the unincorporated community of Rosamond, California, Hanley Investment Group arranged the sales of four single-tenant net-leased investments at a newly developed Grocery Outlet-anchored shopping center. The new construction properties, which were sold to four separate buyers, were occupied by Grocery Outlet, Starbucks Drive-Thru, 7-Eleven and O’Reilly Auto Parts, and closed within several months of each. The four buildings totaled a combined 28,462 square feet and over $19.3 million in total sales. The individual sales achieved record pricing.

Although rising interest rates, historic-level inflation and market uncertainties due to geopolitics could impact future pricing, we expect values on single-tenant and multi-tenant retail pad properties with two to five tenants (especially those with a drive-thru and national credit tenants with long-term leases) to remain very steady in 2022. 

Prices of retail asset classes that are more dependent upon financing (e.g., assets with a bigger price point and unanchored retail with non-credit tenants) could be impacted first, faster, and more significantly by the multiple projected interest rate hikes that are expected this year. However, record prices may have a long runway based on the lack of supply of quality available investment opportunities and unprecedented investor demand. The abundance of capital sitting on the sidelines seeking to be deployed is at an all-time high. Even with more forecasted interest rate increases this year, along with stock market volatility, all of these factors will continue to keep pricing and cap rates at historic levels for core grocery-anchored centers, single-tenant net-leased assets and multi-tenant retail pad properties that could closely mirror the second half of 2021 market conditions. 

— Bill Asher and Jeff Lefko are executive vice presidents with Hanley Investment Group Real Estate Advisors.

This article was originally published in the May/June issue of California Centers magazine. 

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