The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful:
When looking at typical cap rates in retail commercial properties, one should look at the type of retail property they’re investing in first. A single tenant net lease building, like a McDonald’s, with super high credit will likely carry 5 to 6% cap rates for a high quality single tenant. For a multi-tenant commercial property at C level might be upwards of 9% or higher.
Richard Wilson: What would be the typical cap rates you see on a lot of retail properties? With multi-family in valued areas, you can pay 2 to 3% cap rates, and lots of times they’re trading at 3 to 5% cap rates. With retail, what kind of ballpark numbers are you talking about?
S.L. Van Der Zanden: So, there’s different types of retail, so the most expensive are the single tenant net lease buildings, like a McDonalds or whatever. They’re generally super high credit, they’re long term leases, and they’re basically an enhanced bond. So, those can go even in the low 4 K-ups. But typically it’s more like 5, max 6, cap rates for a good quality single tenant. Once you get to my world, the multi-tenant world, a triple A property, the lowest it would trade for would be a 5-k up. And it would probably trade in the 5 to 6. A more straight forward A property would be 5 to 6%, a B property 7 to 8 to maybe 9, a C property for sure is 9% cap or higher. Like a retail mall might be selling at a 12 or a 15 cap rate.
Richard: Sure, okay.