Boulder Group: Single-Tenant Net Lease Sector Slows a Bit

The single-tenant net lease sector slowed in 2016 following a “robust” 2015, reported Boulder Group, Northbrook, Ill.

Transaction volume fell nearly 7 percent in the sector, from 58 billion in 2015 to $54 billion last year, said CoStar Group, Washington, D.C.

“The slowdown in 2016 transaction volume can be mostly attributed to the uncertainty surrounding rising interest rates and the future results of the 2016 election,” Boulder Group Vice President John Feeney said in the firm’s first quarter Net Lease Market Report.

The net lease market experienced “significant” new supply of properties to the market during the first quarter, Feeney said. He noted that supply increased by nearly 20 percent compared to the fourth quarter.

Most of that supply increase came from the retail sector, which increased by 24 percent, Feeney said. But single-tenant net lease retail cap rates remained at 6.19 percent, unchanged from the prior quarter. Cap rates for the single-tenant net lease industrial sector increased 10 basis points to 7.27 percent while single-tenant net lease office sector cap rates increased 4 points to 7.12 percent.

“The overall sentiment is that we are in the late stages of this real estate cycle,” Feeney said. “Accordingly, property owners are selling assets in the current market to take advantage of the historically low cap rate environment.”

Boulder Group reported that the overall net lease market remains “active” with 1031 and private investors, largely due to the sector’s passive nature and the stable investment returns that the net lease asset class can provide.

Private investors closed the most single-tenant net lease transactions in 2016, Boulder Group said, noting that private investors typically prefer properties that include long-term leases to credit tenants. “Accordingly, during the first quarter cap rates for recently constructed properties tenanted by Advance Auto Parts and CVS compressed by 15 and 25 basis points, respectively, despite the overall market [cap rate increases],” Boulder said.

The net lease market is likely to remain active because investor demand–especially private investor demand–for this asset class remains strong, Boulder said. “The effect of interest rates on cap rate volatility will be the primary focus for net lease participants, as most net lease participants believe that cap rates will increase by the end of 2017,” the report said.