Calkain: Single-Tenant Net Lease Cap Rates Increase

Single-tenant net lease cap rates increased 18 basis points in the fourth quarter–the first increase since fourth-quarter 2015–reported Calkain Cos., Herndon, Va.

The 10-year Treasury rate increased by 82 basis points during the quarter, from 1.63 percent in early October to 2.45 percent by year end.

“Single-tenant net lease cap rates continue to trend with interest rate movements and experienced a small increase,” Calkain’s fourth-quarter Cap Rate Report said. “We also noticed the spread narrowing by 65 basis points since last quarter. It’s too soon to tell, but this may simply be a lag in the market to reflect higher interest rates with correspondingly higher cap rates.”

Calkain noted that convenience stores saw one of the largest cap rate increases, more than 100 basis points. “This substantial increase was a result of many short-term deals with less than 10 years remaining,” the report said. “Many [triple-net leased] convenience stores trading in the fourth quarter did not have a high investment-grade credit, causing an overall cap rate increase for the sector.”

Big-box single-tenant net lease properties saw an 83.3 basis point cap rate increase, Calkain said, largely due to several non-credit deal closing in tertiary locations during the quarter. But the dollar store subsector remained mostly stable with a slight 7.4-basis-point increase. Dollar General, which makes up 60 percent of the dollar store sector, showed a 10 basis point increase while Family Dollar’s average national cap rate increased by 9 basis points.

Average cap rates for the quick-service restaurant and casual dining sectors remained relatively consistent, moving fewer than 25 basis points, Calkain reported.

The pharmacy sector as a whole showed a 24.3 basis point decrease since the third quarter. “A majority of these deals were long-term new stores,” Calkain said. It noted that Walgreens’ stores made up three-quarters of pharmacy sales during the quarter, including many in Florida, where cap rates usually trade lower than anywhere else except for California. CVS stores, which made up 25 percent of the pharmacy sample set, showed a 28 basis point average cap rate increase during the quarter, the report said.

Calkain said it expects that cap rates will follow an upward trend if the 10-year Treasury rate continues to increase with an expanding economy. But it predicted that any interest rate increases will be “nominal” over the next few months.

“We expect investor demand [in single-tenant net lease assets] to remain strong,” the report said.