Overall, net lease cap rates fell by 25 basis points in 2011. The primary drivers of this trend are lack of product (especially high quality product) and an ease in lending conditions. Construction of new net lease product continues to flow at a trickle while financing has become more available – with local and regional banks competing with insurance companies for credit tenant deals. Investors have shown a willingness and ability to invest but are hindered by lack of product to satiate their demand. This lack of supply and increase in demand has forced prices up and cap rates down – many would argue that 2012 promises to be a seller’s market.

It is worth noting that these numbers illustrate the average trend in net lease cap rates and the net lease market itself is highly diverse depending upon tenant, lease terms and location. Though these factors have always been significant, their effects have recently compounded. Investors have shown a preference for high quality tenants in prime – urban and suburban – locations and are willing to pay some of the highest prices in recent years to obtain them. Cap rates in prime markets can be up 125bps lower than the charted averages of many segments. However, investors are increasingly showing interest in properties containing lower credited tenants or located in secondary locations – exchanging risk for higher returns. Net lease investments continue to gain traction as an alternative investment instrument for cash flow and yield investors.

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