Credit, location and lease term have always been integral to lower cap rates. Today, however, the floor for properties possessing such qualities is steadily dropping. Quality net lease investments are in high demand, creating some of the lowest cap rates seen in years.
It is no secret that investment activity surrounding high quality net lease assets has been increasing. The economy is perceived as improving, retail has survived and all that “money on the sidelines” is back in the mix. Safe, reliable assets are receiving the most attention. In real estate, it is hard to find a safer investment than top tier net lease properties.
Due to lack of construction during the recession, the pool of “grade A” net lease assets available is relatively small and continuously shrinking. Assets possessing the valuable triumvirate of credit, location and lease term are short in supply and high in demand. The result is plummeting cap rates.
A good example of this is a PNC/Walgreens multi-tenant transaction we recently completed. It featured a very favorable location in a core market - Fairfax, VA - which has a top 10 national ranking for median household income, strong credit ratings (PNC and Walgreens both rated A+ by S&P) and attractive lease terms (ground leases with 20 years for Walgreens, 15 years for PNC). As a result this property sold at a 5.90% cap rate. This example is very illustrative of the demand for high quality NNN properties and the dropping cap rate floor.
It is very likely this trend will continue for the rest year – when new development and higher interest rates may force cap rates back up.
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Jonathan Hipp
Jonathan Hipp began his career in real estate over 25 years ago. In his early years as a broker, he ventured into the net lease industry and quickly began leading the US net lease market, closing over $3 billion in transactions. In 2005, Jon founded Calkain Companies, a company focused solely on net lease investment services. As President and CEO, he has been instrumental in building the firm into one of the leading Net Lease real estate companies, transacting over $12 billion of net lease deal volume over the past 13 years. He has expanded Calkain’s services to include brokerage, advisory, asset management, capital markets, and industry research. He has become a well-known resource, panelist, and speaker at various Net Lease and Industry conferences and is a regular contributor to GlobeSt.com on real estate trends. In June 2015, Jon’s passion for the real estate business was again recognized as he was nominated for the Top Real Estate Player in the DC area by SmartCEO magazine.
