CHICAGO—Cap rates in the single tenant net lease market have been on a long-term slide that eventually reached historic lows, but that era may be over. A boost had been expected, and in the second quarter, rates increased across all asset classes when compared to the previous quarter, according to a new report from the Boulder Group, a net lease firm in suburban Chicago.
Cap rates for retail and office properties increased slightly by three and two bps to 6.23% and 7.14% respectively, according to Boulder. Cap rates for net lease industrial properties increased by 10 bps to 7.37%.
This is the first time in six years that rates have increased across all sectors, Randy Blankstein, president of Boulder, tells GlobeSt.com. “The long-term fall in cap rates may not be over, but we're certainly late in the cycle with a better chance of cap rates going higher versus lower going forward.”
He attributes the current rise to push back from investors on pricing “due to the historically low cap rate environment,” rather than other factors such as the Fed increasing its rates. The decision to begin boosting rates late last year, for example, did not have an immediate impact on cap rates in the net lease market.
But In the second quarter of 2017, the spread between asking and closed cap rates widened across all three sectors. The spread increased by six bps for both the net lease retail and industrial sectors to 35 and 32 bps respectively. The spread in the net lease office sector increased by five bps to 31 during the same time period.
“After years of the market being perceived as more favorable to sellers than buyers, the widening spread combined with a change of investor sentiment has shifted the market back to neutral,” according to Boulder.
And even though the reputation of many bricks and mortar retailers has cratered due to the competition from e-commerce, many of the retailers in the single tenant market are doing fine. “The problem tenants and product types have largely been isolated to department stores and tenants frequently located in enclosed shopping malls,” the report states. “As a result, the net lease market is benefitting as capital continues to enter the net lease market.”
The market could get another shot in the arm by Walgreens' decision to call off its potential merger with Rite Aid and instead acquire its 2,186 stores. Pharmacy transactions had fallen off due to the uncertainty which hung over the sector, but that gridlock should end and transaction volume surge during the rest of the year.
CHICAGO—Cap rates in the single tenant net lease market have been on a long-term slide that eventually reached historic lows, but that era may be over. A boost had been expected, and in the second quarter, rates increased across all asset classes when compared to the previous quarter, according to a new report from the Boulder Group, a net lease firm in suburban Chicago.
Cap rates for retail and office properties increased slightly by three and two bps to 6.23% and 7.14% respectively, according to Boulder. Cap rates for net lease industrial properties increased by 10 bps to 7.37%.
This is the first time in six years that rates have increased across all sectors, Randy Blankstein, president of Boulder, tells GlobeSt.com. “The long-term fall in cap rates may not be over, but we're certainly late in the cycle with a better chance of cap rates going higher versus lower going forward.”
He attributes the current rise to push back from investors on pricing “due to the historically low cap rate environment,” rather than other factors such as the Fed increasing its rates. The decision to begin boosting rates late last year, for example, did not have an immediate impact on cap rates in the net lease market.
But In the second quarter of 2017, the spread between asking and closed cap rates widened across all three sectors. The spread increased by six bps for both the net lease retail and industrial sectors to 35 and 32 bps respectively. The spread in the net lease office sector increased by five bps to 31 during the same time period.
“After years of the market being perceived as more favorable to sellers than buyers, the widening spread combined with a change of investor sentiment has shifted the market back to neutral,” according to Boulder.
And even though the reputation of many bricks and mortar retailers has cratered due to the competition from e-commerce, many of the retailers in the single tenant market are doing fine. “The problem tenants and product types have largely been isolated to department stores and tenants frequently located in enclosed shopping malls,” the report states. “As a result, the net lease market is benefitting as capital continues to enter the net lease market.”
The market could get another shot in the arm by Walgreens' decision to call off its potential merger with Rite Aid and instead acquire its 2,186 stores. Pharmacy transactions had fallen off due to the uncertainty which hung over the sector, but that gridlock should end and transaction volume surge during the rest of the year.
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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.
