Just Sold: CVS in Lexington Park, MD

Ground + Space announced today the sale of a CVS in Lexington Park, Maryland. This property is a 10,125-square-foot retail asset prominently situated within a fast-growing retail corridor. Ground + Space Principal Michael Zimmerman exclusively marketed the property and represented the seller, an Alabama-based corporation. The property sold for an admirable cap rate of 5.48 percent.

The NN lease features a corporate guarantee and an extremely rare 20 percent rental increase within the first option period. The tenant recently extended the base term of the lease by 20 years. The current lease term will last through 2037, signaling a strong commitment to the site.

The property sits at a signalized intersection with nearly 23,000 cars passing daily. Visitors to the site benefit from easy connections to major highways including Interstates 95 and 495. The CVS is close to an expanding retail area along Route 236 and Great Mills Road that features a strong mix of national and local retailers. Lexington Park itself is an affluent area with a prominent military presence that provides a $3 billion impact to the local economy annually.

About Ground + Space

Ground + Space is a net lease brokerage firm that leads with an emphasis on personalized relationships. Michael Zimmerman and team have curated a brokerage firm and investment sales platform focused on boutique amenities and down-to-earth service. Ground + Space is rooted in more than 20 years of experience aimed at providing the best data, relationships and success rates in the business. Interested in commercial real estate investment? Contact us today to find out more about our current listings!


Cap Rate Trends: What’s Next?

Now that we are in the middle of the third financial quarter of 2019, it’s time to look at what changes cap rates have undergone since the final quarter of 2018. Last year saw stagnant cap rates and a tendency toward caution when it came to commercial real estate transactions writ large. Interest rate fluctuations and a U.S. government shutdown were just two of the many factors investors took into consideration when choosing to buy or sell commercial real estate properties. Now that investor confidence and optimism are beginning to rise, the commercial real estate market should see steady cap rate trends in most areas, although some segments of the market could experience fluctuations.

Changes by The Federal Reserve

Although the job growth market is continuing to drive the U.S. economy, the Federal Reserve recently cut its policy rate by a quarter of a percentage point, marking the first time that the central bank has lowered interest rates in more than a decade. What does this mean for the commercial real estate industry? Probably nothing. According to many industry experts and reports, this interest rate cut is unlikely to change or boost commercial real estate values in any appreciable way. Since the end of 2018, there has been a noticeable decline in financing rates. Despite that decline, cap rates for commercial real estate properties throughout the nation have remained stable. Although increasing access to capital is always a positive, there is no research to support that this access will translate into a surge in transaction activity.

Commercial Real Estate Forecast

The first few months of 2019 brought about another round of corporate bankruptcies and store closings. Companies like Toys ‘R’ Us, Payless ShoeSource, Shopko, Dressbarn and even Pizza Hut have all been selling off property and leases. However, store closures and bankruptcies have been impacting the commercial real estate industry for some years now. Retail cap rates climbed significantly throughout 2017 and 2018, often rising above 7.9 percent. Most of these cap rate increases were driven by Class B and C retail, while Class A commercial real estate yields have stabilized in some markets thanks to well-placed assets with strong, credit-rated tenants and high rental rates. Cap rates for properties like destination mixed-use projects and freestanding buildings with nationally recognized tenants should fare well, although older properties with vacancies will pose their own unique challenges.

Interested in maximizing your investment opportunities? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to receive a full evaluation of your commercial real estate assets. We can help you determine whether now is a good time for you to sell your property.


4 Ways to Determine the Value of an Investment Property

The value of a commercial or retail property heavily influences its operational performance, the tenants’ leasing options and the investment yield. Investors and appraisers utilize several different methods to determine the value of a property, often depending on the type of real estate, the availability of information or the goal of the investment. Gain insight into four of the most common methods below to accurately assess the value of single and multi-tenant commercial properties and maximize your profits from retail real estate leasing.

The Income Approach

The income approach is a frequently used method for evaluating a commercial property. In this situation, the value of a retail investment property relies on the interpretation of the net operating income (NOI) and the capitalization rate (cap rate). The NOI of a retail property is determined by subtracting operating expenses and vacancies from the overall potential rental income. The cap rate predicts the annual rate of return by dividing the NOI by the most recent value of the property.

By evaluating these factors, the investor focuses on recent sales and operational figures. The income approach also allows for simple adjustments to account for unique scenarios, such as likely tenant additions or scheduled maintenance.

The Cost Approach

The cost approach method considers the cost of the land plus the cost of constructing the “highest and best use” building from scratch. For example, if the piece of land is worth $100,000, and constructing a multi-tenant retail property would cost $1.2 million, the cost approach would value this commercial real estate at $1.3 million.

This approach is commonly used for new construction and vacant lots. The simplicity of the cost approach is appealing to investors and appraisers. Additionally, the cost approach accommodates for unique factors such as zoning laws to yield an accurate and current valuation.

The Capital Asset Pricing Model

The capital asset pricing model (CAPM) is a comprehensive approach to assess a commercial or retail investment property that includes risk and opportunity cost. The CAPM considers the return on investment (ROI) on a risk-free investment, and labels it as a control, which is referred to as “beta.” Frequently-used betas include US Treasury bonds or real estate investment trusts (REITs). This valuation method is based on the comparison of expected returns between a guaranteed investment and the property in question. If the potential returns on a bond exceed those of a retail investment property, the investment isn’t financially advisable.

The CAPM assumes inherent risk and natural economic behavior that doesn’t always meet expectations. Accordingly, net lease investors find the CAPM useful for estimating the value of a property investment, understanding the approximate risks and establishing optimal tenant leasing structures.

The Sales Comparison Approach

The sales comparison approach (SCA), sometimes referred to as the market approach, utilizes prices from similar and nearby commercial or retail investment properties. This method takes the property’s general attributes into consideration and is best applied over a significant period of time. Investors and appraisers rely on the uniform metrics in this approach, such as price per square foot and recent sale price, to determine the value of the commercial real estate in question.

The SCA has the advantage of simplicity and accessibility, but often neglects the uniqueness and distinctive characteristics of a commercial property. Investors and appraisers find the SCA useful to gain insight on neighborhood pricing trends or for quick property valuations.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


Common Cap Rate Mistakes

The capitalization rate, or cap rate, provides investors and landlords with valuable insight regarding the specifics of commercial real estate investments. If interpreted properly, the cap rate can be used by investors to compare and contrast similar investment opportunities, and landlords can include it in their decision as to whether or not to sell a commercial property. There are several instances in which cap rate can be leveraged as an effective metric, but it is often misinterpreted, misunderstood or misused. Below are the most common mistakes associated with cap rate in terms of commercial real estate investments.     

Mistakes Calculating Cap Rate

Though the cap rate formula is straightforward on the surface, its very few components, net operating income (NOI) and overall property price, are comprised of complex elements. A cap rate is often a projection of future expectations, and inaccurate NOI estimates will significantly affect the resulting percentage.

The factors involved in calculating NOI include complicated and ambiguous terms such as expected vacancy or alternate income. These pieces are influenced by an overwhelmingly large pool of external forces and can fluctuate frequently and unexpectedly. It’s imperative to precisely calculate each step of the NOI formula before determining a property’s cap rate.  

Misunderstanding Limits of Cap Rate

Cap rate should never be used as the sole deciding metric for an investment property. Countless other factors must be considered before choosing to buy or sell commercial real estate. Cap rate alone is not an effective assessment for short-term investments as it does not account for the value of potential improvements or appreciation.

Additionally, cap rate on its own does not consider the time value of money, which makes it difficult to apply to long-term investments. A cap rate serves merely as a glimpse at the one-year expected rate of return based on previous averages and should not be used for more than it’s intended.

Furthermore, cap rates are limited indicators, as they can be considered high in one market, and low in another. Location, supply and demand, types of property, types of leases and other factors all have a significant impact on the cap rate value and worth.         

Misinterpreting a High or Low Cap Rate

One of the most common mistakes investors make when interpreting cap rate is assuming that a high cap signifies a better investment. Though a high cap rate does present the opportunity for higher returns and a lower overall purchase price, it also indicates a higher risk. A property with a high cap rate may be in a less desirable location and have a higher vacancy and older amenities, whereas a property with a low cap rate is often well-managed, up to date and in a popular neighborhood with hardly any vacancies. As a general rule, a high cap rate signifies higher risk and a low cap rate signifies lower risk.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!


How to Use Cap Rate

To adequately analyze a commercial retail investment opportunity, investors often refer to the capitalization rate (cap rate) for efficient comparison. Utilizing the cap rate can be an effective method to evaluate commercial real estate as it measures the potential annual rate of return on a property.

What affects cap rate?

The cap rate is attained by dividing a commercial property’s net operating income (NOI) by the overall property price. The elements that factor into these two components can significantly affect the resulting percentage. On a macroeconomic level, supply and demand of real estate drastically affect property value and, thus, cap rate. On a microeconomic level, how business tenants operate, market themselves and make decisions can have a considerable influence on their ability to stay in business and remain reliable tenants, which affects NOI and cap rate. Other important factors that affect the cap rate of commercial retail property are the location, types of tenant leases, property type, interest rates and the overall national economic prosperity.

Measure of Risk

Both sellers and investors interpret cap rate as a percentage of risk. A low cap rate often signifies higher property value. From an investors standpoint, the potential returns on a property with a low cap rate are lower but, therefore, less risky. Commercial retail property with a high cap rate is indicative of a lower purchase price, but also a high NOI. A higher NOI increases the risk for investors as it depends heavily on the reliability of the tenants and the well-being of the economy. Additionally, sale prices can be manipulated to show more appealing cap rates.

How to Apply Cap Rate

Though landlords typically prefer lower cap rates for higher selling prices, investors prefer higher cap rates because they have a lower purchase price and higher possible returns. The way cap rate is applied and interpreted depends on the personal preference of the investor. Additionally, it’s imperative to remember that understanding the degree of risk in a commercial retail property investment is substantially more complex than merely identifying the cap rate. Several external factors can display a low cap rate one moment and a high cap rate the next.  

Due to these considerations, cap rates are best used to compare and contrast similar markets or properties. A cap rate can also serve as a practical leveraging tool in the decision to sell a commercial property. The valuable insight that cap rates provide can assist investors and landlords in their endeavors, but effective application of this information requires the help of a knowledgeable commercial retail investment brokerage.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!

 


Everything You Need To Know About Cap Rate

Capitalization rate, often shortened to cap rate, is a fundamental term used in commercial real estate (CRE). Gain insight into cap rate to maximize real estate acquisition knowledge and advance your investment property analysis.  

What is cap rate?

Cap rate measures the annual rate of return on a commercial investment property. This percentage is discovered by dividing the net operating income (NOI) by the overall property price. NOI is the natural revenue generated by the property, or the rent paid by tenants, after subtracting operating expenses. The overall property value is the total price of the commercial property.

Cap Rate = Net Operating Income ÷ Overall Property Price

What factors into cap rate?

Several factors affect a cap rate equation. The NOI is affected by vacancies, the length of tenant leases, the types of tenant leases and the creditworthiness of the occupants. The value of the CRE is affected by the location, the current market, the quality of the structure or real estate and many other conditions. To fully understand cap rate, it is imperative for investors to evaluate these different factors.  

Why does cap rate matter?

Cap rate is important to investors as it measures a commercial property’s return rate and enables simple comparison to comps. Additionally, the percentage of risk must be considered when determining cap rate. A property with low cap rate may have high vacancy and is, therefore, a high-risk investment. A cap rate can also be inversely affected by a property in poor condition, as the overall value may be lower. Because cap rates involve a multitude of contributing factors, the formula is best used to quickly compare properties of similar nature.  

What is a good cap rate for CRE?

A “good” cap rate depends upon context and circumstance. As property price plays a major role in the equation, anything that dictates property value becomes of critical importance in determining good or bad cap rates. A cap rate may be regarded as high in Los Angeles and extremely low in Milwaukee. In high-demand locations, a cap rate of 5 percent can be considered a good investment opportunity. A knowledgeable brokerage services firm typically helps investors interpret and analyze cap rates.

When should investors NOT use cap rate?

Though cap rates provide valuable insight, it is important for investors to remember that they are largely based on income and are often projections of expected revenue. Unlike cash-on-cash returns, cap rates do not account for any debt on the property. Additionally, a commercial property with complex operating procedures and fluctuating expenses may not be represented properly by a one-year cap rate. These factors should be taken into consideration before investing.

Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!