NNN URBAN PROPERTIES

NET LEASE ADVISOR
YOUR SOURCE FOR INVESTMENT REAL ESTATE™
Second Quarter 2010
The Rise of
NNN URBAN PROPERTIES
Bound
TE N A NT SPOTLIGHT:
Emerging Trends
in Real Estate
COMPANIES, INC.
The Rise of
NNN URBAN PROPERTIES
By: Rick Fernandez
“In the middle of every difficulty
lies
opportunity”
- Albert Einstein
V
isitors to the Calkain website
(www.Calkain.com) may have noticed considerable documenting
over the past 12 months of the sale of
Triple Net (NNN) urban properties. Demand for credit rated property in the urban core of primary markets has always
been strong. We now see inclusion of local, non-credit tenants involving smaller
transaction sizes drawn into the mix of
investment properties sought by investors. Investors have shown a willingness
to pay aggressive caps for urban properties. An increase in mixed use residential
condominiums brought about by population movement toward the urban core
and a pause in expansion by national retailers has contributed to the wide-ranging demand for NNN urban properties.
Coming on the heels of the recession
and the ensuing across-the-board hike
in cap rates, this move to dense, high
traffic urban locations signals where investors want to be over the next decade.
Recently identified as a top niche investment trend by the Urban Land Institute
(ULI), mixed-use urban projects have
drawn retailers and investors to this
CALKAIN COMPANIES, INC. asset type even in the current market
cycle. Driven by a desire to spend less
time in traffic, live in a smaller footprint
and work and play within an urban atmosphere, aging boomers and Gen XYZers alike are leaving the edge and making
their way back to the city. Developers
have capitalized on this trend by coupling
high-rise condominium living with easily
accessible ground floor retail space. The
convenience of these on-hand amenities
makes for an attractive lifestyle for local residents and nearby office workers. While not a new phenomena, the
rise in urban mixed-use development
meets the market at a very good time.
Unable to find quality assets in a tight
market and unable to secure favorable
debt for less well known tenants in
secondary and tertiary markets, investors are finding that lenders are putting
more emphasis on the intrinsic value of
the real estate. Urban properties are
typically more easily adaptable to alternative uses and are viewed favorably by
lenders. Investors seeking passive real
estate investments are turning to urban, income-producing condominiums
(the new “infill”) of varying types as a
suitable component of their investment
portfolios. In a recent Real Capital Analytics (REA) report it was quoted that
NET LEASE ADVISOR
there were over $20 billion in retail condominium sales over the past five years.
That figure only represents transactions
of $5 million or greater in size. As the
chart below indicates, our own experience proves that there were a significant
number of transactions well below REA’s
$5 million baseline. Included in the mix
of under $5 million condominiums is
a broad array of tenants ranging from
companies with Standard and Poors
AA+ credit ratings to start up restaurant concepts with personal guarantees.
That broad range of tenants is good
news for developers and investors alike.
To focus on a single market, the Washington, D.C., area seems to be thriving well amidst the downturn. The
Wall Street Journal recently reported:
“The nation’s capital has
drawn interest from investors seeking to place a defensive bet in the still-turbulent
property market. The idea is
that companies working with
the federal government have
a more stable business ….”
WSJ 3-17-10
For investors, an income producing
NNN property, whether a condominium,
Second Quarter 2010
zero lot line structure or a combination of the two, can cover all three of
the “L’s” of real estate and quite often at a price point unavailable to the
average investor hoping to acquire
“downtown” investment property. The
pause in expansion by national retailers and the lack of quality NNN investment real estate has prompted investors
to give urban real estate a hard look.
As reported by Calkain in a previous
article, “While retail condos may not
look like a typical net leased asset,
their design and operation are almost
identical to the normal, free standing,
single tenant buildings so popular in
today’s investment market.” However,
an income-producing condominium
may not be right for everyone. Condominium ownership comes with its
own unique challenges including partitioning of common element expenses,
condominium board representation,
condominium fees and condominium
association policies and restrictions. In
spite of this, like other NNN investment
properties, the tenant is responsible for
all of those expenses. Investors must
weigh whether the potential challenges of urban condominiums are significantly different from the CAM charges,
easements, and restrictions associated
with typical NNN investment properties. Risk is inherent in any investment
but the solid urban location fueled by
strong, daily, pedestrian traffic may be
equal to a pad site situated as an outparcel in a performing suburban center.
Washington, D.C., scores the
highest marks during a recession. While hard-pressed
lenders pull back in most cities, major insurers and big
banks have taken a long term
view and are actually providing financing for new deals.
ULI - Emerging Trends in
Real Estate 2010
For developers, the rise of urban retail
condominiums and mixed-use office
projects and the willingness of traditional NNN investors to pursue these assets offers an opportunity to monetize
portions of the assets as well as unhook
from the completed portion of the project. Developers using this streamlined
method of disposition have used their
newly found proceeds to either pay
down existing debt or fund new projects.
Additionally, a properly structured urban property provides flexibility in how
a developer can subdivide the spaces
often providing an infusion of cash
from the sale of the retail units long
before the residential properties have
sold out. The typical condominium
resident boasting high discretionary
income and a steady appetite for consumer goods is a highly sought after
demographic for retailers. From a NNN
investment perspective, the NNN retail
condominium units, like a typical strip
center, benefit from a strong anchor
or even shadow anchored presence. A
unique aspect of urban properties is
that the anchor can be a dense concentration of office space or even a Metro
station because the flow of subways,
buses, cars, taxis and pedestrians is
the engine that drives the street scene.
Investors are returning to the market and
the time is right for urban investments.
In today’s market, suitable NNN investment property is hard to find. Quality
NNN investment property is harder still.
Perhaps the hardest of all, are the $1 million to $5 million size transactions where
the average investor and 1031 Exchange
buyers focus their attention. Urban investments fit this niche and NNN investors have demonstrated a willingness
to step up and pay in excess of $1,000
a square foot to acquire these assets.
Calkain Urban Investment Advisors
(CUIA), a division of Calkain Companies,
specializes in premier investment properties in high density, urban districts
throughout the United States. CUIA
builds on Calkain’s record of success
in brokering some of the most notable
transactions within the urban net lease
market and focuses strictly on assets
located within metropolitan regions.
Calkain’s newest and proven division understands the ever-growing net leased,
urban investment market and the requirements of investors and developers working within the space. Our advisors guide clients through the many
aspects which affect their prospective
properties, ensuring only the best investment decisions are pursued.n
F O R M O R E I N F O R M AT I O N :
Rick Fernandez | Managing Director
Calkain Companies, Inc .
rfernandez@calkain.com
Phone: 703.787.4714
R E C E N T nnn p R O P E R T Y S A L E S I N W as h in g ton , D . C .
Location
Sale Date
SF
Rent/SF
$/SF
NOI
Sales Price
Cap Rate
PNC Bank
1401 P St., NW
September 2006
4,110
$65
$1,119
$267,000
$4,600,000
5.80%
Wachovia Bank
1150 K St., NW
July 2007
3,424
$62
$1,119
$210,650
$3,830,000
5.50%
Fedex/Kinkos
1327 14th St., NW
November 2007
2,285
$60
$810
$137,100
$1,850,000
7.41%
Garden District
1520 14th St., NW
April 2008
2,775
$50
$673
$138,750
$1,866,424
7.43%
Lululemon
1515 15th St., NW
December 2008
2,306
$60
$791
$138,360
$1,825,000
7.58%
Pitango Gelato
1515 15th St., NW
September 2009
550
$80
$1,124
$44,000
$618,000
7.12%
Mitchell- Gold
1526 14th St., NW
October 2009
7,338
$35
$368
$256,830
$2,700,000
9.50%
TD Bank
1515 15th St., NW
March 2010
4,403
$69
$979
$301,606
$4,300,000
7.00%
The Matrix
1529 14th St., NW
Pending
8,862
$38
$518
$332,950
$4,592,413
7.25%
1515 P St., NW
Pending
1,133
$77
$1,089
$87,375
$1,234,110
7.08%
Sweetgreen
CALKAIN COMPANIES, INC. NET LEASE ADVISOR
Second Quarter 2010
Washington, D.C. | Arlington, va
URBAN RETAIL INVESTMENT
T h e
p l a c e
t o
t u r n
f o r
u r b a n
r e t a i l
1749 - 1753 Columbia road, NW | Washington, D.C.
NOI $868,848
h i g h li g h ts
»»
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CVS/pharmacy
Georgia Ave NW & new HAMPSHIRE Ave, NW | Washington, D.C.
P R I C E $ 4 , 2 3 0 , 7 6 9 | C AP R a t e 6 . 5 0 %
h i g h li g h ts
»»
»»
»»
»»
»»
CVS/pharmacy
»»
3130 Lee Highway | Arlington, VA
P R I C E $ 7 , 6 9 2 , 3 0 8 | C AP R a t e 6 . 5 0 %
h i g h li g h ts
»»
»»
»»
»»
»»
WA L G R E E N S
URBAN
INVESTMENT
ADVISORS
COMPANIES, INC.
CALKAIN COMPANIES, INC. m ore
in f or m ation
NET LEASE ADVISOR
Second Quarter 2010
Calkain is
Bound
I
n addition to attending and hosting several industry events in recent
months, Calkain has begun preparing for the International Council of
Shopping Centers’ (ICSC) annual RECON
conference in May. Real estate veterans and professionals attending the Las
Vegas ICSC have scheduled meetings
with developers, REITs, investors and asset owners seeking to learn more about
trends and overall market dynamics,
especially given the uptick in net lease
investment transactions over the last six
months.
When discussing income-producing real
estate and developments in the market,
Calkain is considered to be a premier
industry leader and resource with an
abundance of information on such topics. Thus far in 2010, Calkain was present and featured at ICSC events in Washington, D.C., Virginia and Florida and has
been tapped for 2011’s planning boards
for subsequent ICSC conferences.
Calkain’s principals extend and invitation and encourage all interested
ICSC-Las Vegas attendees to schedule
appointments to meet with them in advance. Meetings can be scheduled from
Sunday, May 23rd through Tuesday, May
25th by contacting Cheri Martian at
cmartian@calkain.com. n
2010 ICSC
Mid-Atlantic
Idea Exchange
2010 ICSC
Florida
Idea Exchange
To meet with a Calkain team
member while in Las Vegas
Call 703.787.4714 or
e-mail cmartin@calkain.com
CALKAIN COMPANIES, INC. NET LEASE ADVISOR
Second Quarter 2010
I
Emerging Trends in Real Estate
nfill vs. Suburbs. Road congestion,
higher energy costs, and climate
change concerns combine to alter
people’s thinking about where they
decide to live and work. “It’s a fundamental shift.” The lifestyle cost-of-living
equation starts to swing away more dramatically from bigger houses on bigger
lots at the suburban edge to greater
convenience and efficiencies gained
from infill housing closer to work.
These homes may be more expensive
on a price-per-pound basis, but reduced
Calkain
Companies
keeps
growing
C
alkain Companies recently promoted Rick Fernandez to Managing Director of the new Urban
Investment Advisors (CUIA) divison.
Gerlad E. Burg was also welcomed to the
team as Managing Director of Calkain
Reality Advisors.
The new division, Calkain Urban Investment Advisors (CUIA), was formed
to capitalize on and grow the business
already procured in urban retail by
Calkain’s professionals. The new division
will focus solely on the growing dynamic
CALKAIN COMPANIES, INC. driving costs and lower heating/cooling
bills provide offsets. Time saved avoiding traffic hassles moderates stress and
enhances productivity. “Two-hour commutes reach tipping point with higher
energy costs” and “near-in suburbs will
do well especially if they link to business
cores by mass transportation.” Empty
nesters and later-marrying echo boomers continue to flock to cities and urbanizing suburban areas. For aging baby
boomers, infill apartment or townhouse
living means less upkeep and closer
proximity to cultural and entertainment
attractions. The young singles crowd
stays closer to the action, yet they don’t
need to worry about finding the right
suburban school district for children.
As 30-something couples have kids and
consider schools, “more will orient to
infill locations and less edge-increasing
numbers of suburban school systems will
lose advantages as tax bases falter.” n
of Urban Net Lease
Investments.
environment. Calkain is a proven leader
in the market and Rick’s confirmed experience only solidifies our role within the
net lease community.”
With the new division comes the
promotion of Rick
Fernandez,
the
Managing Director
of CUIA. Rick was
previously Assistant
Rick Fernandez
Vice President of
Managing Director,
Calkain Realty AdCalkain Urban Investvisors, the private
ment Advisors
market division of
Calkain Companies. Rick has a solid
background in the urban investment
community where he has transformed
developments into investment opportunities for both developers/owners and
investors.
Jonathan Hipp, Chief Executive Officer
and President stated, “Rick has always
been a big part of our expansion plans
and we are very fortunate to have him
grow this part of our company. His success is a testament to his professionalism within the net lease industry as a
whole and specifically within the urban
NET LEASE ADVISOR
Source:
Calkain also recently welcomed Jerry
Burg to the team.
Jerry will be the
Managing Director
of Calkain Realty
Advisors in the Reston, Virginia office.
Before
joining
Calkain in January
2010, Jerry was
Managing Director
& SVP at Northmarq
Investment Services where he focused
on investment sales in the Washington,
D.C. marketplace. Prior to Northmarq he
was a SVP at Marcus & Millichap and a
member of the KBC Group which closed
over $235 million in investment sales.
He is a founding member of the National Practice for Medical Office Building
Sales and became a licensed real estate
agent at Carey Winston/Transwestern. n
Gerald E. Burg
Managing Director,
Calkain Realty Advisors
Second Quarter 2010
TENANT SPOTLIGHT:
Walgreens Pharmacy
By: Winston Orzechowski
W
algreen Company (NYSE: WAG)
is the nation’s largest drugstore retailer in terms of sales,
even though it has fewer store locations
than its closest competitor CVS. Walgreens and its competitor drugstores
are engaged in the retail sale of prescription and non-prescription drugs
and front-store products such as beauty
care, personal care, household items,
candy, photofinishing, greeting cards,
convenience foods and seasonal items,
as well as liquor and tobacco where permissible by law. As of March 31, 2010,
Walgreens operated 7,720 locations
in 50 states, the District of Columbia,
Guam and Puerto Rico. It plans to grow
its store base by approximately 4.5-5%
in fiscal 2010.
Prescription sales constitute a large
portion of Walgreens business, which
accounted for 65% of sales during fiscal 2009. Third-party sales, where reimbursement is received from managed
care organizations, government and private insurance, were 95.3% of prescription sales in fiscal 2009. Overall, Walgreens filled approximately 651 million
prescriptions in fiscal 2009.
CALKAIN COMPANIES, INC. The poster-child of net lease properties,
Walgreens has been a highly traded investment property given the low risks
typically associated with these drugstore properties. Walgreens properties
boast a strong tenant rating as indicated
by its investment grade A2 and A+ credit
ratings from Moody’s and S&P, respectively. Additionally, the drugstore sector
remains stable given is nondiscretionary merchandise offerings. Walgreens
showed a 6.8% sales increase during August pushing their total sales for fiscal
year 2009 up 7.3% to $63.35 billion.
Walgreens is the stereotypical net lease
investment as they exemplify quality in
all three key characteristics: Credit, Real
Estate, and Lease Terms. As the leader
in the retail drug store, they boast the
highest corporate credit rating by both
Standard and Poor’s and Moody’s. One
key benefit to their strong rating is that
even in this debt starved market, Walgreen’s credit rating qualifies their net
NET LEASE ADVISOR
leased locations for
Credit Tenant Lease
(CTL) financing, which
can run as high as 97%
loan-to-value creating
a larger qualified buyers pool.
On the real estate side
of things, Walgreens demands premier hard corner locations
greater than 1.00 acre. Generally, sites
are 1.15 - 1.75 acres to fit their store
prototypes of 14,820 SF, although units
can range from 10,800 SF - 15,000 SF. To
compete with rival CVS, Walgreens has
generally been willing to pay premier
rental rates to secure prime sites with
a primary lease term of 25 years. The
most significant lease variation from
Walgreens of late has been the difference in their renewal options, previously requiring eight to ten renewal
options of five years in length; they recently signed a number of leases that
were 75 years in length, however after
the 25th year Walgreens has an annual
cancellation option, essentially creating
50 1-year renewal options. This small
variation created significant concern for
investors because at the end of the initial 25-year lease term, these assets will
not be financeable.n
Second Quarter 2010
CALKAIN’S
RECENT CLOSINGS &
CURRENT HEADLINES
Pitango Gelato
Washington, D.C.
$1,123.64 psf
Lululemon
Washington, D.C.
$791.41 psf
PNC Bank
Washington, D.C.
$1,119.22 psf
TD Bank
Washington, D.C.
$977.27 psf
Fedex Kinkos
Washington, D.C.
$809.63 psf
Sweetgreen
Washington, D.C.
$1,089 psf
“
Calkain has sold a slew of ground
floor retail condos at Logan Circle’s
nearby Metropole. Late last year, an independent private investor snapped up a
550 square-foot ground-floor retail condo
occupied by Pitango Gelato for a whopping $1,123 per square foot. “
“
From retail condominiums to big
boxes, Jonathan Hipp views Washington, D.C.’s urban retail market as a place
for growth. And with the formation of
Calkain Urban Investment Advisors under the leadership of Rick Fernandez,
previously assistant vice president of
Calkain Realty Advisors, he is prepared
to be at the forefront of that growth.”
“
Calkain Companies, Inc. has launched
a new division that is focusing strictly
on urban net lease investments. Called
Calkain Urban Investment Advisors, it is
launching out of the gate with $20 million in completed deals and another $30
million the company is currently marketing.”
CONTACT NET LEASE ADVISOR
HE A D Q U A R T E R S
11150 SUNSET HILLS ROAD, SUITE 300
RESTON, VA 20190
T 703.787.4714 • F 703.787.4783
CALKAIN COMPANIES, INC. SOUT HEAST
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TAMPA, FL 33607
T 813.282.6000 • F 813.282.6098
MID-ATLANTIC
7 FOX DEN PLAZA
MCHENRY, MD 21550
T 301.389.9471 • F 301.387.9461
NET LEASE ADVISOR
COMPANIES, INC.
WWW.CALKAIN.COM
Second Quarter 2010