Boulder Group: Retail Single-Tenant Net Lease Cap Rates Rise–For a Change

Retail sector single-tenant net lease cap rates increased in the fourth quarter for the first time since 2013, reported Boulder Group, Northbrook, Ill. 

Retail cap rates rose 9 basis points to 6.19 percent, Boulder Group said. The jump represented the largest increase in retail cap rates since second-quarter 2011. Cap rates for the single-tenant net lease industrial sector increased 3 basis points to 7.17 percent during the quarter while single-tenant net lease office sector cap rates remained unchanged at 7.08 percent.

“The main contributing factor for the increase in cap rates for the retail sector can be attributed to the rise of Treasury rates during the fourth quarter,” said Boulder Group Vice President John Feeney. He noted that the 10-year Treasury yield increased significantly to 2.45 percent during the quarter from 1.62 percent in early October. 

Feeney said net lease market participants are watching how rising Treasury rates will affect net lease valuations. 

The spread between asking and closed cap rates for retail properties also increased by 5 basis points during the fourth quarter, Feeney noted. “This was the largest spread between asking and closed cap rates for retail properties since the fourth quarter of 2013,” he said. 

The spread between asking and closed cap rates for all three single-tenant net lease sectors–retail, office and industrial–ranged between 31 and 32 basis points, Boulder Group reported.

Feeney said the net lease market will likely remain “active” in 2017, because investor demand for this asset class remains healthy. “The expectation is that there will likely be upward movement in cap rates moving forward,” he said, noting that a recent Boulder Group survey found that the vast majority of active net lease participants expect cap rates to rise in 2017. Most net lease market participants expect cap rates to increase between 25 and 49 basis points by the end of 2017, he said. 

“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.