Retail is far from dead. The single-tenant net-leased market is a prime example of how investors crave ‘credible income,’ like bonds. With cap rates for single-tenant product so compressed, it is difficult for investors to find modest returns.
For example, a single-tenant Chipotle in the Southeast is currently on the market for a 4% cap rate. The tenant signed a 15-year initial term with 10% increases every 5 years. Putting debt on a single-tenant asset like this at 70% LTV with 3.75% interest and a 25-year amortization schedule results in a cash-on-cash return well under 2%! Even if one doesn’t put debt on the asset, and if you take the leveraged cash flows over the initial term, an investor will receive roughly 66% of their initial equity prior to the tenant committing to stay during their option term.
By comparison, let’s look at a multi-tenant example: A multi-tenant building also located in the southeast, consists of 5 tenants, including a Chipotle, Vitamin Shoppe, Noodles & Co., Eyemart Express & Mattress Firm. This property can be purchased for a 6.25% cap rate. In the single-tenant example above, the total equity required was $3,125,000. In this example, using similar debt terms as above: 70% LTV at 4% with a 30-year amortization, the investor needs $2,670,000 of equity.