Single-Tenant Net Lease Cap Rates Reach New Lows

An In-N-Out Burger single-tenant net lease asset

Single-tenant net lease cap rates fell across the board in late 2019, reported The Boulder Group, Wilmette, Ill.

The sector saw cap rates fall to historic lows in all three sub-sectors: retail, office and industrial.

Cap rates in the single-tenant net lease retail sector decreased 14 basis points to 6.07 percent during the fourth quarter while office sector yields decreased six basis points to 6.94 percent. The industrial sector saw a five basis point decrease to 6.90 percent.

Cap rates had fallen in the second and third quarters as well.

“Cap rates remain at low levels due to the historically low interest rate environment combined with a robust economy,” said Boulder Group Senior Vice President John Feeney in the firm’s Net Lease Market Report.

Noting a growing spread between seller expectations and buyer expectations, Feeney said real estate investors are behaving like the real estate cycle has reached a late stage with fewer buying opportunities, “especially those of high quality,” he said. The supply of available net lease properties shrank nearly 10 percent in the fourth quarter, he said. The number of industrial properties on the market fell 5 percent quarter-over-quarter and the number of available office assets dropped more than 13 percent.

“Regardless of the decrease and limited quality supply in the fourth quarter of 2019, transaction volume for 2019 is expected to surpass 2018 by a significant margin,” Feeney said. “This is driven by a fundraising environment for cash-flow vehicles [such as single-tenant net lease assets] with returns that exceed corporate bonds.”

Feeney said uncertainty surrounding the economy and upcoming presidential election is creating differing forecasts for the net lease market. He said 45 percent of active net lease participants expect cap rates to rise this year while 33 percent expect cap rates to decrease. A minority expects cap rates to remain relatively stable. The same poll in late 2018 showed less than 5 percent of participants expected cap rates to remain the same or decrease in 2019.

“Investor demand for the net lease sector should remain active throughout 2020,” Feeney said. “Following a year with voracious transaction velocity in the second half, expectations are for that pace to continue into 2020.” But with widely differing viewpoints about near future cap rate trends, “market participants will actively monitor the property and capital markets to create a viable investment strategy for 2020,” he said.