Single-Tenant Net Lease Cap Rates Diverge
Single-tenant net lease property cap rate changes varied significantly by sector in the second quarter, new reports said.
Retail sector single-tenant net lease cap rates increased 10 basis points during the quarter, representing the sector’s largest cap rate increase since second quarter 2011. But cap rates compressed for the office and industrial sector by 5 and 25 basis points respectively, said John Feeney, Senior Vice President with Boulder Group, Northbrook, Ill.
“The primary sentiment among net lease investors is that cap rates should remain relatively stable and within the range of the past few years across all three asset classes,” Feeney said. “Investors will be carefully monitoring the monetary policy decisions of the Federal Reserve as well as the capital markets effect on pricing.”
NNNetAdvisors, Los Angeles, said the sector’s most notable trend was the spread between cap rates and treasury rates, which reached a post-recession low 3.22 percent during the quarter. “This measurement is important, as it is a general indicator of returns that investors can achieve when implementing debt on an acquisition,” the firm’s Net Lease Property Report said. The measure typically follows the movement of cap rates because most debt takes 60 days from rate lock to close. “Investors continue to weigh their increased cost of capital and push for more yield in cap as they underwrite and pursue future acquisitions,” the report said.
Private 1031 buyers anxious to close deals continue to drive pricing on the most attractive deals, NNNetAdvisors said. Given the current low cap rate and low spread environment, 1031 buyers that have recently sold property at a low cap rate seek to replace their income with their new acquisition. “[Private 1031 buyers] are continually outbidding those who are not motivated by tax consequences and a short timeline, the report said. “We expect to see slow and continual upward movement in cap rates in the third quarter.”
The supply of single-tenant net lease properties on the market continues to increase, Feeney said. “Owners of single-tenant properties are bringing properties to market in attempt to maximize value prior to cap rates increasing further.” He noted the net lease sector experienced an 11-plus percent increase in supply during the quarter, mostly due to new net lease retail properties coming online.
The spread between asking and closed cap rates continued to widen for the retail and industrial sectors, Boulder Group said. The spread for the most desired assets–those with long-term leases in primary market locations remained similar to recent years but properties with short-term leases, weak credit, limited or no rental escalations and tertiary locations have experienced the greatest cap rate expansion.
