Single-Tenant Net Lease Cap Rates Again Reach New Lows

Cap rates in the single-tenant net lease retail and industrial sectors fell once again in the fourth quarter to record lows, reported Boulder Group, Wilmette, Ill.

Retail and industrial single-tenant net lease cap rates compressed by six and 13 basis points, respectively, compared to the third quarter. Retail cap rates reached 6 percent and industrial cap rates finished the year at 6.75 percent. Single-tenant net lease office properties held steady at 6.90 percent cap rate, a record low for that sector.

“Cap rates continued at record low levels due to the historically low interest rate environment combined with a flight to quality in the net lease sector by investors,” Boulder Group Senior Vice President John Feeney said in the firm’s Fourth Quarter Net Lease Market Report.

The report noted some “uncertainty” looming this year. “Many investors are carefully monitoring the investment landscape to see the effectiveness of the Covid-19 vaccines and the timing of the economy’s full reopening,” it said. “The new presidential administration and possible Democratic control of the Senate could put Section 1031 exchanges in potential jeopardy, which would in turn severely impact the net lease sector. There is a mixed forecast from net lease investors as it relates to future cap rate movement with the aforementioned uncertainty.”

In addition, COVID-19 has affected the net lease sector. Transaction volume peaked in 2019, then was slowed during 2020 by a “dismal” second quarter with only $12 billion in transactions, the report said. “While the fourth quarter of 2020 is expected to be the strongest quarter of the year once transactions volumes are tabulated; 2020 transaction volume ended the year down significantly when compared to 2019,” Boulder reported.

The report said investor demand for the net lease sector should remain active this year, especially for high-quality tenants in essential businesses. “Investors will be carefully monitoring the lingering effects of COVID-19 on the economy and various business sectors as well as the effectiveness of the COVID-19 vaccines,” it said. “Following a year of sporadic transaction velocity, the expectation is that transactions will be concentrated in specific segments of the sector, especially for retail.”