Single-Tenant Net Lease Cap Rates Drop Across Sectors
Single-tenant net lease cap rates fell across the board in the second quarter, reported The Boulder Group, Northbrook, Ill.
Cap rates in the single-tenant net lease retail sector decreased four basis points to 6.23 percent during the quarter while office sector yields decreased three basis points to 7.07 percent. The industrial sector saw a one basis point decrease to 6.99 percent, said Boulder Group Senior Vice President John Feeney.
The quarter represented the first downward cap rate movement for the retail sector in more than a year following five quarters of upward movement, Boulder’s Net Lease Market Report said. “As the retail industry continues to evolve amid negative headlines, investors of net lease retail properties are putting greater emphasis on tenant credit quality and lease length,” the report said. “Furthermore, as many believe we are in the late stages of the real estate cycle, investors are targeting properties that can withstand a recession or uncertainty in the market.”
The report noted new construction 7-Eleven properties–considered both recession- and ecommerce-resistant–experienced the greatest cap rate compression, falling 12 basis points during the quarter to 4.88 percent.
“With downward pressure on cap rates in all three sectors, the spread between asking and closed cap rates saw a decline when compared to the prior quarter,” Feeney said, noting the spread between asking and closed cap rates decreased by 14, 6 and 7 basis points for retail, office and industrial net lease properties respectively. He called the narrowing spread an illustration of the current competitive marketplace for net lease properties.
Boulder said the downward cap rate pressure seen in the second quarter largely came from the change in the Federal Reserve’s monetary policy. “A rate cut is expected at the Fed’s upcoming July meeting and the majority of prognosticators expect at least one additional cut in the near future,” Feeney said.
CBRE, Los Angeles, reported rising demand for U.S. net lease real estate led to $68.3 billion in investment volume last year–the highest annual total since the firm began tracking the market in 2002. “The global search for yield and portfolio diversification is driving foreign investors to the U.S. net lease market,” the CBRE Net Lease Investment Report said.
Boulder said investor demand for the net lease market should exceed transaction volume expectations initially forecast for 2019 with sale velocity increasing as the year progresses. “Cap rates in the net lease sector should experience downward pressure, but remain relatively stable throughout 2019,” the report said. “Accordingly, net lease property investors will carefully monitor the capital markets and the effect on pricing as the market expects multiple rate cuts from the Federal Reserve in 2019 and 2020.”
