By Rob Edwards, Principal at Pinnacle Real Estate Advisors

Originally published in Western Real Estate Business Magazine – March 2017

A changing of the guard is taking place across Colorado’s STNL market as new tenants enter the market while others fade out. The tenant fadeout is most evident in the restaurant industry. The hot brands from two decades ago can either dig into their pockets and modernize or slowly sink into irrelevance with their underperforming location in hopes of finding the next better corner.

The problem is the next better corner has a tremendous amount of competition from new retailers. The old guard will lose to the new retailer nine out of 10 times, especially when dealing with a sophisticated developer who knows which tenants push cap rates lower. Think about it. Imagine a great new corner in the hot, new area. Which tenant do you see in your mind? Dairy Queen or Chick-Fil-A? Don’t get me wrong. I love a DQ Chill, but I know way more consumers who enjoy Chick-Fil-A’s clean dining rooms, modern menu, attentive staff and catchy branding. Kneaders, Dion’s, Garbanzo, Snarf’s and Illegal Pete’s are a few other quick-service restaurants popping up in Metro Denver.

Besides restaurants, the Colorado net lease market has a new wet competitor in the form of indoor swim schools. Tenants like SafeSplash are diving into the market. SafeSplash is developing their own buildings or absorbing vacant spaces in family focused neighborhoods. If you haven’t visited a national credit tenant swim school lately, you will be amazed. They are busy, and their buildout is intense. For example, converting a vacant single tenant Blockbuster space costs a swim school more than $750,000. And you thought it was expensive to relocate a dental office! A commonly overlooked benefit of owning an in-ground pool is the depreciation recovery period. This includes 39 years for commercial property, 15 years for the pool, and seven years for pool equipment like pumps and heaters. To break this down in layman’s terms, an investor potentially won’t have to pay any income taxes on the property’s rental stream for seven years because of the accelerated depreciation.

Let’s shift gears to medical users. Not medical marijuana — but urgent cares. Expediency, exceptional service and reasonable prices are fueling the urgent care boom. Urgent cares are starting to offer specialty services too. These include pediatrics, chiropractic, family practice, occupational medicine and physical therapy. Urgent cares show steady growth, predictable margins, and private investment from all sectors, such as private equity, angel investors, health insurers and health systems. They are actively competing and winning corners.

Another interesting change is the re-emergence of gas stations. The main difference is the new players to Colorado, such as Kum & Go, who want large hard corners to support their oversized convenient store and enough gas islands to service a small army. The other players in the gas station war are grocers looking to find pad sites somewhat close to their stores. Their preference is to own their parcel, but they will often do a ground lease. Everyone loves gas points, but the Denver multifamily 1031 exchanger might love buying hassle-free STNL properties more. These exchangers continue to push net leased cap rates down as they chase yield, credit tenants and long-term leases. The robust Colorado net lease market will continue to strengthen with the help of the thousands of jobs, retailers and residents flocking here every year.

Click Here to Read More – Rob Edwards