Cap rates in the net lease sector are at all-time lows. That statement (of the obvious) in and of itself is not a headline. The change in the mix of properties making up what is being sold today versus the last few years is, however, worth looking at. The properties that have been driving the ever lower cap rates are ironically the ones with less credit behind them. Indeed for each year over the past three years, the proportion of tenants rated A- or better has steadily decreased.
A major reason for this has been limited expansion/new construction by the higher rated tenants, such as banks and auto parts stores; while at the same time significant store growth by the lower rated tenants, such as the dollar stores.
We have seen record cap rate compression in the STNL market despite properties being less credit worthy as a whole. The chart below illustrates the magnitude of this shift.
As we move into 2016 and an uncertain interest rate environment, we can expect this trend to continue. Interestingly the data seems to suggest that this logic may not extend into the unrated credit territory however.
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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.
