GlobeSt.com - November 26, 2009
Citibank came to market with 17 of its Bay Area retail branches last fall offering 10-year leasebacks with up to 3% annual rent increases based on the CPI. Marketed by CB Richard Ellis, all but a couple of the well-located former CalFed branches quickly had signed LOIs from high-net-worth investors looking for an inflation hedge. The closings didn’t go quite as smoothly due to the financial meltdown in the fourth quarter but 13 of them closed this year at an average cap rate of 6%, with the first seven selling at a 5.8% cap rate on average.
“It was a huge undertaking getting that many [sales] going at once,” CBRE retail investment sales specialist Don LeBuhn tells GlobeSt.com. “But they were the best locations so the intrinsic value was there and even though it took a long time to close deals due to the deteriorating economy [which took Citibank’s stock price from $19 to less than $1 while the properties were on the market] the buyers stuck with their prices, with most using 50% bank financing.”
The bank branches range in size from 3,000 square feet to 7,000 square feet and are located in several Bay Area markets including Burlingame, San Mateo, Los Altos, Palo Alto, San Jose, Santa Clara and Sunnyvale. One of the two remaining properties, a branch in Millbrae, closed last week at a 6.5% cap rate. The other should be under contract within a week or so, also at a sub 7% cap rate, says LeBuhn, a vice president with CBRE’s private client group.
All of the transactions were under $5 million, where LeBuhn says there is “tremendous velocity” because thanks to a lot of people who have $1 million or $2 million to invest and have not done well in the stock market in recent years. “They’re thinking I can put this down on a piece of real estate that has built-in annual rental growth and a steady income-producing tenant,” he says.
Moreover, LeBuhn says properties of this size, quality and price are achieving much better cap rates than more expensive deals requiring more equity. “When you get up to $10 million an above it’s highly unlikely you can get even close to a 6% cap rate; it will be more like 7.5% to 8.5%.”
“The yield curve based on pricing steepens dramatically as you ramp up toward $10 million,” explains LeBuhn’s partner, CBRE managing director Trevor Thorpe. “It’s the impact of the capital markets; the greater the equity the greater the risk premium that is required.”
“Ultimately these properties could have been sold as a portfolio at a mugh higher cap rate,” LeBuhn says. “Citibank wanted to maximize their return and we accomplished that for them.”
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