Single-Tenant Net Lease Sector Finishes 2017 Strong

Retail sector single-tenant net lease cap rates reached a new low in the fourth quarter–6.07 percent–reported Boulder Group, Northbrook, Ill.

Cap rates for the office and industrial sectors also remained low. Office cap rates increased 2 basis points to 7.00 percent and industrial sector cap rates decreased 2 basis points to 7.25 percent during the quarter, Boulder Group Vice President John Feeney noted. “Cap rates in the fourth quarter of 2017 represented the lowest point of the year for all three sectors,” he said.

Most of the demand at this point in the cycle is for higher-quality assets, Feeney noted. “The overall sentiment is that the market is in the late stages of the current real estate cycle,” he said. “Accordingly, property owners are attempting to sell assets in the current market to take advantage of the historically low cap rate environment regardless of asset quality.”

But for lower quality properties, the market is no longer generally “seller-oriented” regarding asset pricing, Boulder’s Net Lease Market Report said: “In recent years, sellers were perceived to have the upper hand, however most active net lease participants believe there has been a move to neutral.”

Despite a slight rise in net lease properties on the market, there is still a relative lack of new construction properties with long-term leases. Accordingly, cap rates for recently constructed assets occupied by 7-Eleven convenience stores and McDonald’s restaurants compressed by 13 basis points on average during the fourth quarter, the report said, noting both tenants are “e-commerce resistant,” which more and more net lease investors find appealing.

The net lease market should remain active this year as investor demand for this asset class remains strong, the report said. But it noted there will likely be upward movement in cap rates moving forward. “The vast majority of active net lease participants expect cap rates to rise in 2018,” Boulder said, noting most net lease participants expect cap rates will increase between 25 and 49 basis points by the end of the year. “With more rate hikes expected by the Federal Reserve in 2018, investors will carefully monitor the capital markets and the effect on pricing.”