Los Angeles and Orange Counties are among the top net rental investment markets, according to a recent report CBRE. Los Angeles ranked fourth in the survey with $ 3.3 billion in 2018, up 38% year over year, while Orange County ranked 13th in 2018 with $ 1.7 billion last year .
"The net lease retail markets in Los Angeles and Orange Counties are among the strongest in the country due to a number of factors, including dense populations, very high barriers to entry, strong incomes and solid job growth, and good consumer spending." Patrick Wade, SVP at CBRE, tells GlobeSt.com. “In addition, drive-through companies do particularly well in these areas due to the population density and high traffic volume. Getting new permits through permits in these markets is a challenge, which makes existing ones incredibly valuable and creates barriers to competition. "
The report measured all net rental assets, office, industrial and retail properties. Fast food restaurants, however, are the most popular net rental investment in the region. “The most popular net leasing asset classes in the retail segment are fast food restaurants, coffee passages, grocery stores and, increasingly, fitness outfits,” says Wade.
Despite the high level of activity, there are limited opportunities for net rental investment, and this is especially true for assets with fast service. The momentum has boosted competition. "Supply for this type of business is rare, so if it is available, it increases competition, especially when a creditworthy tenant is on a long-term lease," says Wade. "We've closed several deals in the past 24 months that have seen double-digit deals, including the lowest cap rate Chic-Fil-A and Starbucks have ever sold in La County."
In addition, transit locations are becoming more and more difficult to build, which further restricts the product type. "Several cities have eliminated or greatly reduced new transit permits," says Wade. "Since most fast food restaurants generate 60% to 80% of their sales from drive-throughs, these websites are becoming increasingly valuable, which has only increased rents and investor appeal."
Given the strength of the market and the popularity of net rental investments, Wade expects activity and demand to be strong through the end of the year. "We believe that demand for net rental property will remain strong across all categories, especially given the direction the Fed is headed and the expectation that rates should stay low for the next 12 months," he says. “There are limited alternative asset classes that offer secure returns with minimal management. Los Angeles and Orange County will continue to lead the nation with lower cap rates for this type of product. "