Net Lease Seller, Buyer Expectations Converge

Net lease asset buyer and seller expectations are converging as the spread between asking prices and sale prices decreased from 8.6 percent to 6.4 percent in late 2019, said NNNetAdvisors, Los Angeles.

The average base term remaining on properties sold during the fourth quarter held steady at 11.8 years, but the average number of days on market increased by 15 days, NNNetAdvisors’ fourth quarter Net Lease Property Report said.

“2019 ended with both average and median net lease cap rates increasing for the first time since the great recession shakeup between 2007 and 2010,” the report said, noting median cap rates increased 7 basis points year-over-year to 6.20 percent while average cap rates increased 3 basis points to 6.30 percent.

The 10-year Treasury closed the year at 1.92 percent, down from more than 75 basis points from year-end 2018.

“While 2019 cap rates increased as a whole, each sector of net lease performed differently as the e-commerce threat to retail continues to impact certain tenants more than others,” the report said.

For example, bank properties saw their fourth straight year of increasing cap rates, NNNetAdvisors reported. Banking firms have been slowing their brick-and-mortar expansions as e-banking has grown both in effectiveness and trustworthiness.

Convenience store cap rates decreased, as they has in 2018, NNNetAdvisors said. “C-Stores continue to ring the register as consumers visit these well-located properties in person to purchase fuel, tobacco, beer, lottery tickets, drinks and snacks,” the report said.

Restaurants continued their recent strong surge with another year of decreasing cap rates. “Consumers continue to visit restaurants on a regular basis, opting to pay a premium for prepared foods while saving time on meal preparation and clean up at home,” NNNetAdvisors said, noting cap rates for casual dining and quick service restaurants fell to record lows last year.

Both car-related properties and discount stores ended the year with similar cap rates as the year before. “Investor opinion remains divided on the future of these concepts,” NNNetAdvisors said.

Drug store cap rates slipped last year, mostly driven by CVS locations. Parent company CVS Health, Woonsocket, R.I., closed its third straight year of decreasing cap rates in 2019. But Rite-Aid store cap rates remained mostly flat and Walgreens had a “challenging” year that included store closings and one of the poorest stock performances in the Dow Jones Industrial Average, NNNetAdvisors said. “Walgreens properties recorded their second straight year of cap rate increases, in line with Walgreens cap rate averages that we saw back in 2013,” the report said. It noted online pharmacy options are cutting sharply into the drug store sector.

“We expect to see more of the same from each sector,” the report said. “We expect both convenience stores and restaurants to continue to be in high demand, discount stores and auto-related concepts to remain in neutral territory, while drug stores and banks face an uncertain future.”