Net-Lease Properties: Limited Supply, Strong Demand

Cap rates for retail, office and industrial single-tenant net-lease properties declined steadily throughout 2015 as investors pursued the asset class’s stable returns, reported the Boulder Group, Northbrook, Ill.

Boulder Group Vice President John Feeney noted that cap rates for retail, office and industrial net-lease properties declined by 15, 35 and 26 basis points respectively over the past 12 months.

Retail sector cap rates held steady in the fourth quarter at their historically low rate of 6.25 percent. Office and industrial sector reached new record lows of 7.00 percent and 7.44 percent, Boulder reported. “This can be attributed to the limited supply of product in a market with high demand despite a widespread expectation of higher interest rates in the future,” Feeney said.

Feeney said the overall supply of net-lease assets decreased by more than 11 percent between 2015’s third and fourth quarters. Retail assets experienced the largest decline of 12.5 percent. He noted that increased demand caused net-lease sector cap rates to remain stable despite volatility in the 10-year Treasury rate.

The fourth quarter represented the first time in 2015 that the cap rate spread between asking and closed pricing increased for retail properties, Boulder reported. “Owners of net lease product have attempted to take advantage of the low cap rate environment over the course of 2015,” Feeney said, adding that the spread for retail and office properties expanded by five and six basis points for retail and office properties respectively, “illustrating the pushback from buyers on the aggressive pricing sellers are seeking.”

A majority of active net-lease participants surveyed by the Boulder Group expect that cap rates will remain unchanged or rise slightly this year. But 52 percent said cap rates will likely increase at least one point.

“After the decision to increase rates at the December Federal Reserve meeting, investors will carefully monitor the capital markets and effect on pricing,” Feeney said.