Some STNL Sectors See Record-Low Cap Rates

Single-tenant net lease cap rates for retail and industrial properties reached record lows of 6.18 percent and 7.10 percent respectively in the first quarter, reported Boulder Group, Northbrook, Ill.

Office sector cap rates increased slightly to 7.20 percent, said Boulder Group Vice President John Feeney. “The limited supply kept cap rates low for all three sectors despite the volatility in the 10-year Treasury over the past year,” he said.

Boulder’s Net Lease Research Report said net lease sector supply remains constrained. Feeney said overall supply compressed by nearly 3 percent in the first quarter. “New-construction properties remain in lower supply as the construction pipeline remains limited when compared to previous years,” he said.

But Feeney said new-construction properties see the highest demand from Section 1031 like-kind exchange and private buyers because these new assets typically have the longest lease terms. Accordingly, cap rates for recently constructed properties tenanted by AutoZone auto parts, DaVita Healthcare Partners and Fresenius Medical Care compressed by 40, 50 and 25 basis points, respectively, in the first quarter, he said.

“Cap rates for retail assets continue to decline and trade at much lower cap rates than that of net lease office and industrial properties due to their preference amongst private and 1031 buyers,” Feeney said. “Private and 1031 investors typically pay lower cap rates than institutional investors, especially for retail assets.”

In addition, private and 1031 buyers are more familiar with retail tenants, prefer retail assets’ lower price points and understand their tenants’ general business practices better than industrial or office tenants, Feeney noted.

Feeney said Boulder Group expects the net lease market to remain active as investor demand and allocated capital for this asset class remains strong. With 10-year Treasury volatility affecting capital markets, investors will monitor the capital markets and adjust their bids accordingly, he said: “[Section] 1031 and private investors will be less affected by the volatility of the financing markets than institutional investors. This can be attributed to their acceptance of lower returns when financing or all-cash closings due to their 1031 timing and tax consequences.”