STNL: Cap Rates Steady Despite Supply Jump

Single-tenant net lease property cap rates held steady or increased just slightly in the second quarter even as significant new supply reached the market, reported Boulder Group, Northbrook, Ill. 

STNL retail sector cap rates remained unchanged at a historic low 6.18 percent while office cap rates increased five basis points to 7.25 percent and industrial cap rates increased 16 basis points to 7.26 percent, said Boulder Group Vice President John Feeney. 

“While cap rates remained stable in the second quarter, an influx of net lease assets entered the market this quarter,” Feeney said. He noted that total supply increased nearly 11 percent.

While strong demand from Section 1031 like-kind exchange and private buyers kept retail cap rates firm, recent capital market volatility contributed to the office and industrial cap rate increases, Feeney said. “Historically, institutional capital is the traditional buyer for single-tenant office and industrial assets; however, institutional investors are more sensitive to the volatility of the financing markets in 2016 and have adjusted cap rates accordingly,” he said.

Feeney noted that recent events in Europe and the subsequent drop in 10-year Treasury rates “could increase volatility for the near term.”

The spread between asking and closed pricing increased for retail and office properties by two and nine basis points respectively as owners raised their asking prices, Feeney noted. “Owners of net lease product have attempted to take advantage of the low cap rate environment over the course of 2016 with aggressive pricing,” he said. 

Geoffrey Faulkner, Managing Partner with NNNet Advisors, San Francisco, said sellers continue to take advantage of the current market conditions “and will likely do so for the near future as Brexit and other perceived market turmoil continue to promote future uncertainty.” 

While the long-term cap rate compression produces profits for long-term property owners, many buyers look forward to a cap rate upswing, Faulkner said in NNNet Advisors second-quarter report. “When cap rates begin to increase, interest rates will likely be moving in the same direction,” he said. “Higher interest rates are not ideal, but a chance to make acquisitions at cap rates that are historically sustainable will be welcomed by many.”

Feeney noted that widening spreads between asking and closed cap rates illustrated what he called “cap rate pushback” from buyers on those aggressively priced assets. As a result, the marketing time for single-tenant properties grew by 11 percent compared to the prior quarter.

“The net lease market is expected to remain active in 2016 investors continue to seek safe and stable returns,” Feeney said. “The majority of net lease participants expect cap rates to hold steady for the near term, however the perception is that there is upward pressure on cap rates.”