“The net lease market should remain active throughout the remainder of the year, with the expectation that cap rates should hold steady for the near term,” the firm concludes. “The market will remain favorable to sellers as investors continue to seek this asset class due to the passive nature of the leases and institutional and fund investors attempt to reach fund allocations by year's end.”

CHICAGO—Strong demand from 1031 and private investors pushed cap rates for the single tenant net lease retail sector down slightly to just 6.1%, another historic low, in the third quarter of 2016, according to a new report from the Boulder Group, a net lease investment firm in suburban Chicago. During the same period, cap rates for the office and industrial sectors decreased to 7.08% and 7.14% respectively, declines of 17 and 12 bps. Retail cap rates have stayed below 6.65% since early 2015.

“The uncertainty of traditional investment asset classes coupled with the stable yields generated by the single tenant sector has created an abundance of investor demand for this sector,” Boulder says. The number of retail properties on the market increased slightly, from 3,310 to 3,353, but there remains a lack of new construction properties with long term leases.

As a result, during the third quarter cap rates for recently constructed properties tenanted by McDonalds, DaVita and Advance Auto Parts compressed by 30, 25 and 15 bps, respectively. The rate for a McDonalds constructed between 2000 and 2005, for example, is 4.9%, but those built since 2011 came in at 3.75%. And Advance Auto Parts' from before 2000 had cap rates of 7.6%, while those built since 2011 were at 5.75%.

Much of the new construction seen in the market comes from the dollar store sector. And that large and increasing supply means it is one of the few sectors with increasing cap rates despite the current low cap rate environment. “However, these assets remain in demand with investors who have 1031 exchanges with small equity requirements due to their low price points and long term leases with creditworthy tenants,” says Boulder.

“The net lease market should remain active throughout the remainder of the year, with the expectation that cap rates should hold steady for the near term,” the firm concludes. “The market will remain favorable to sellers as investors continue to seek this asset class due to the passive nature of the leases and institutional and fund investors attempt to reach fund allocations by year's end.”