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Faris Lee’s Conover, MacLellan and Riley: Highlights of 2023 Single-Tenant Sales

Coffee shops such as Starbucks and Dutch Bros. are among the stars of the single-tenant retail world, so much so that Faris Lee Investments recently issued a white paper on the category. However, the universe of assets that the Faris Lee team handles covers a broad spectrum, and each of these asset types had a place in the 2023 investment sales market. Connect CRE recently spoke with managing principals Jeff Conover, Don MacLellan and Shaun Riley for their take on the past year and what 2024 may bring.

In addition to coffee chains such as Starbucks and Dutch Bros., the standout categories last year included quick-serve restaurants, and supermarkets in general. “Investors in these categories are risk averse, securing stable investments and ease of management,” said Conover.

These investors may also gravitate toward single-tenant assets as a more obtainable alternative to larger multi-tenant shopping center acquisitions. “With these single-tenant properties, the majority of transaction are all cash or when financing needed, debt is more readily available than with larger centers,” Riley said.

In the multi-tenant category, the sweet spot was strip shopping centers in the two- to seven-tenant range, often multi-tenant pads fronting anchors in shopping centers or standalone, selling in the $3-million to $7-million range.

Up-and-coming single-tenant categories last year included car washes and electric vehicle dealerships. These sales didn’t occur at the expense of more established categories, though.

“I don’t necessarily think that it was a switch from QSR and coffee,” said MacLellan. “It’s just that we saw a significant supply and development of car washes, which represent a single-tenant, low-management long-term lease, as well as the Tesla/Lucid showrooms that we saw last year.”

2023 also saw burgeoning interest in cannabis dispensaries in those states that have legalized such sales, as well as a resurgence of the sit-down restaurant category. “As the pandemic really challenged the sit-down operators, some investors were naturally discouraged from investing in this product class for the past several years,” Riley said. “In 2023, we saw the investors getting comfortable with the recovering sales from these sit-down restaurant tenants and these investments just became more marketable during the year.”

Although recognizable branding is important in all single-tenant retail categories, it’s especially so in the coffee category. Conover cited Starbucks and Dutch Bros., which has been especially active lately with expansion and introducing new store footprints, along with 7 Brew.

As with the major QSR brands, “It’s like the haves and have-nots” in the coffee category, said Conover. “With QSRs, you’ve got McDonald’s, at the top, In-N-Out, which is more regional out here, and you have Five Guys; in chicken you have Chick-Fil-A and Raising Cane’s. The sales volumes of these top brands are probably 30 to 40% higher than the next tier of each category.”

Looking out into 2024, MacLellan looked at where the market was and where it’s going. “If you look back at 2021 and 2022, it was a perfect storm with significant capital,” he said. “Interest rates were at an all-time low. And we saw more capital coming out of industrial, apartments and land entitlements than we’ve ever seen. That came to a screeching halt as interest rates increased at unprecedented levels affecting sales volume significantly in the middle of ‘22 and then onward through the end of ‘23.”

The current hope in the market is that the Federal Reserve has stopped increasing the federal funds rate,. “But still, the 1031 volume is probably off by 80% on the larger requirements and on the smaller size probably by 65%-70%,” said MacLellan. 2024 is likely to see sales volume rebound as sellers become more realistic in the current interest rate environment.

However, MacLellan predicts that “we’re going to start seeing the impacts of loan maturities, when borrowers will have their debt service increase significantly , and potentially won’t get necessary loan proceeds and these owners will need to add additional equity. So, I think that’s going to have a huge bearing throughout 2024.

“The single-tenant market with strong brands, long-term leases and well-located will always have strong, interest,” he concluded. “But what could happen is that as supply continues to exceed demand, cap rates are going to need to increase to attract buyers’ attention.”

Pictured: A Dutch Bros. in Rialto, CA recently sold by Faris Lee.


Inside The Story

Faris Lee's ConoverFaris Lee's McLellanFaris Lee's Riley

About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 16-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 7-10 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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