Page 14 — Retail Properties Quarterly — November 2023 STNL T ransaction volumes for single-tenant net-lease retail properties in Colorado and nationally are down signifi- cantly through the first three quarters of 2023 in comparison to the prior two years. In the third quarter, there were only 158 STNL retail properties sold in Colorado. This is compared to 198 STNL retail properties in Colorado sold in third- quarter 2022 and 207 Colorado STNL retail properties sold in third-quarter 2021. Through the first three com- bined quarters of this calendar year, STNL retail transactions in Colorado are down over 32% compared to 2022 and down over 29% compared to 2021. STNL retail transaction vol- umes through the first three quar- ters of 2023 nationally are down about 46% and 35% compared to 2022 and 2021, respectively. Diminished 2023 transaction vol- umes across all real estate asset classes have been well-documented nationally – with total transaction volumes down over 50% compared to last year. The widespread decline in real estate transactions created a limited pool of 1031 exchange inves- tors, adversely impacting STNL retail transaction volumes and pricing. STNL retail properties have histori- cally been a popular choice among 1031 exchange investors due to their passive triple net lease structures, high-credit tenants, and long-term leas- es. These assets are particularly attrac- tive investments to 1031 exchange purchasers pivot- ing asset classes, seeking less man- agement and increased stability. The pronounced slowdown of mul- tifamily sales in Colorado directly impacted the demand for STNL retail properties in the state. A challenging lending environment combined with readily available high-yielding risk-free alternative investments, such as money mar- ket accounts, certificates of deposit and Treasurys, further reduced the demand for STNL retail properties. The 10-year Treasury yield briefly reached 5% in October, the high- est level since 2007, applying even further upward pressure on inves- tor borrowing rates. Today, almost all STNL retail property acquisitions funded with debt have negative leverage due to persistently low cap rates and the high borrowing costs. While investor demand is down, a healthy supply of available STNL retail properties remains nationally. According to our 2023 Q3 Net Lease Market Report released in October, the total supply of available STNL retail properties nationally increased by 11.1% from the prior quarter to 2,753 properties. Sellers continue to have aggressive pricing expectations, often disconnected from the market. This resulted in a spread between asking and closing cap rates of 30 basis points. Additionally, the time period needed to market a property increased by 25% to more than eight months, when compared to the prior year. Despite a healthy national supply of STNL retail properties, the amount of available STNL retail properties in Colorado is relatively limited. This is especially true for the “top tier” of Colorado STNL retail properties. The top tier consists of those in the Front Range with long-term leases, new construction, and investment-grade tenants. There has been only a hand- ful of these properties available at any given time for much of this year, which has created a competitive bid- ding environment, resulting in con- tinued aggressive cap rates. For example, we sold a new con- struction Chipotle in Colorado Springs that featured a 10-year lease for a 4.5% cap rate in September. The property received numerous offers and sold for full price shortly after the restaurant opened. As a result of the aggressive pric- ing for STNL properties located in Colorado, some local investors are looking outside of the state for high- er-yielding STNL retail investments. It’s not uncommon to find virtually identical deals in other out-of-state markets, such as the Midwest, for a 50 to 75 basis-point-higher cap rate. We recently helped a Denver-based 1031 exchange investor acquire three new construction O’Reilly Auto Parts properties in Houston and Dallas in September. The properties sold for about a 40 basis point discount compared to where they would have traded if they were located in the Front Range. The “top-tier” STNL retail proper- ties in Colorado continue to trade as aggressively as in any market in the U.S., including California. These top- tier properties are in short supply and will continue to be due to lim- ited new STNL retail developments. Future STNL development will be limited based upon difficult and sometimes unreasonable municipali- ties, reduced tenant expansion plans due to saturation, and many devel- opments becoming cost-prohibitive because of higher financing and construction costs. Investors based locally and nationally that seek these top-tier Colorado properties will have to pay aggressive prices for the fore- seeable future due to the projected supply constraints. s Top-tier STNLs trading despite headwinds Zach Wright Vice president, The Boulder Group Q3 2023 Q2 2023 Q1 2023 Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Number of Properties Sold 158 150 162 171 198 261 235 404 207 245 211 Colorado STNL Retail Properties Sold by Quarter