CHICAGO- The cap rates for single-tenant net leased retail and office properties increased for the first time in two years during the third quarter, according to a new report from The Boulder Group, a commercial real estate services firm located in suburban Chicago. The historically low rates for retail, however, only went up 2 bps, from 7.00% to 7.02%, while office rates went from 7.54% to 7.70%. The cap rates for industrial properties remained steady at 8%.
Boulder attributes the bump in cap rates to the increase in interest rates that hit over the summer. Some sectors of the market, however, seem immune. “Cap rates for net leased properties valued below $8 million have not experienced the same cap rate impact,” the firm notes. “Properties priced below $8 million are in the highest demand amongst individual investors. Individual investors are more likely to pay lower cap rates than an institutional investor as they do not have to meet the same return hurdles and frequently utilize 1031 Exchanges.”
In addition, the number of both retail and office properties added to the net lease market declined by more than 9%, causing a downward pressure on cap rates that moderated the impact of increased interest rates. In the third quarter, 2,502 properties were added to the retail sector, a decline of 9.3% from last quarter. And 232 properties were added to the office market, a decline of 10.1%.
Retail properties remain the most sought after sector, especially in core areas. And since “retailers plan to focus on same store growth rather than expansion,” Boulder notes, the development pipeline remains limited, and this “limited supply of core market assets has caused cap rates for these assets to remain at last quarter's level or even decline slightly in some cases.”
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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.
