CHICAGO—Cap rates in the net lease market went on a long-term slide for several years as the economy recovered from the recession, with single tenant retail properties experiencing an especially steep drop. But the rates for all property types stabilized about 18 months ago, and signs now point to likely increases in the coming year.
In a recent national survey conducted by The Boulder Group, a Northbrook, IL-based net lease firm, the vast majority of active net lease participants expect cap rates to rise in 2018. According to 39% of the respondents, rates will increase between 25 and 49 bps by the end of 2018, and another 22% say rates will go up by more than 50 bps. Just 9% think rates will move down.
The Federal Reserve could have a big impact in 2018. Jerome Powell, the next Fed chairman, “is expected to continue his predecessor's careful path toward gradually tightening monetary policy,” according to a recent report from Chicago-based LaSalle Investment Management.
“It's hard to determine the exact impact of [Fed] rates other than if they rise the cap rates will rise as well,” Randy Blankstein, president of Boulder, tells GlobeSt.com. “However, the correlation is not 100% and depends on a variety of factors.”
Cap rates in the fourth quarter of 2017 for the single tenant net lease retail sector reached a new historic low rate of 6.07%, according to Boulder. During the same time period, cap rates for the office sector increased by two bps to 7.0% and rates for the industrial sector decreased by two bps to 7.25%. Cap rates in all three sectors were at their lowest point of the year.
Still, “the majority of demand remains for the higher quality assets,” Boulder adds. But “the overall sentiment is that the market is in the late stages of the current real estate cycle,” and many property owners have decided to sell to take advantage of the historically low cap rates regardless of asset quality. The number of office properties on the market, for example, went from 408 in the third quarter to 492 in the fourth, a boost of 20.5%. However, with the exception of high-quality properties, most observers believe that the market is no longer seller orientated in regard to pricing, and has instead moved to neutral.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
