Net Lease Sector Shows Stability

Single-tenant net lease sector cap rates remained relatively stable in the first quarter across the retail, office and industrial sectors, reported Boulder Group, Northbrook, Ill.

Retail and industrial sector cap rates increased by 3 and 4 basis points respectively to 6.10 and 7.29 percent. Cap rates for net lease office properties remained unchanged at 7.00 percent.

Boulder Group Senior Vice President John Feeney said the net lease market will likely remain on pace this year with last year because demand for the asset class remains strong. CoStar, Washington, D.C., reported net lease transaction volume finished 2017 at $54 billion, similar to 2016’s $53.6 billion.

“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 2018,” Feeney said. “Investors will be carefully monitoring the monetary policy decisions of the Federal Reserve in 2018, as well as the capital markets and their effect on pricing.”

Feeney noted the net lease sector remains “bifurcated” between properties perceived as high quality–including new construction, assets with long-term leases and major market properties with investment-grade tenants–and lower-quality properties. But the supply of high quality product remains limited, especially in the higher dollar amount range above $7 million, he said.

Most new construction supply in the net lease space remains concentrated with tenants in the dollar store, quick-service restaurant and “medtail” properties–medical properties in locations traditionally used for retail such as shopping center outparcels. But Feeney said net lease properties that exhibit positive real estate fundamentals including below-market rents, strong store sale histories and positioning in strong retail corridors remain a viable alternative for those looking to achieve higher yields.

In a changing real estate environment, net lease property buyers emphasize trends, especially in the retail sector, Feeney said. E-commerce-resistant and “experiential” retail tenants including food, fitness, entertainment and convenience are in high demand, as are medtail properties.