1Q Single-Tenant Net Lease Cap Rates Diverge

Single-tenant net lease cap rates diverged by sector in the first quarter, reported Boulder Group, Northbrook, Ill.

Cap rates in the single-tenant net lease retail sector increased two basis points to 6.27 percent during the first quarter while office sector yields increased eight basis points to 7.10 percent. Conversely, the industrial sector experienced a seven basis point decrease to 7.00 percent, Boulder Group Senior Vice President John Feeney said in the firm’s Net Lease Market Report.

CoStar, Washington, D.C., reported net lease transaction volume exceeded $62 billion in 2018, up 9 percent from 2017 totals.

“The capital markets have shifted to favor sellers in terms of net lease asset pricing,” Feeney said. “In 2018, net lease investors expected the Federal Reserve to continue raising rates in 2019, which caused pause for some investors. However, recently the Federal Reserve has signaled stable rates to the market in 2019.”

At its most recent meeting, the Federal Open Market Committee unanimously agreed to leave the fed funds rate target unchanged at between 2.25 and 2.50 percent. The Fed noted “muted” inflation and said it will be “patient” regarding future interest rate changes.

Feeney said the Fed’s moves toward a more dovish position caused the 10-year Treasury yield to remain between 2.40 percent and 2.70 percent throughout the first quarter after breaking the 3.00 percent level in 2018. “The movement in interest rates has resulted in more favorable borrowing costs and investment returns for buyers of net lease,” he said.

Feeney said a more favorable Federal Reserve monetary policy should provide additional certainty in the net lease markets. “Investor demand for net lease assets remains strong as investors continue to seek yield and passive real estate investments,” he said.

Boulder Group also surveyed its clients about where they expect net lease cap rates will finish the year. An equal number of respondents–29 percent each–predicted rates will end 2019 unchanged or will move up less than 24 basis points or will increase between 25 and 50 basis points. Just 3 percent predicted cap rates will increase 50 or more basis points and just 10 percent said they think cap rates will decrease during the year.

In late 2018, 62 percent of people Boulder Group surveyed predicted cap rates would increase by at least 25 basis points by year-end 2019. But sentiment has recently moved toward a stabilized cap rate consensus. Nearly 40 percent of poll participants said they expect cap rates to remain unchanged or compress in 2019 compared to only 5 percent who said the same late last year.