CHICAGO—Cap rates in the net lease market sank to historic lows at various points in the past few years, but after a relatively short period of stability, investors eager to snap up these properties have pushed rates down again.
The rates for retail properties now stands at 6.11%, a decrease of 12 bps in the past quarter, according to a new report from the Boulder Group, a net lease firm in the Chicago suburbs. This represented the lowest level in the net lease retail sector since the third quarter of 2016 when cap rates were at a historical low of 6.10%. Cap rates for net lease office and industrial properties decreased by 16 and 10 bps to 6.98% and 7.27% respectively.
“The ten-year treasury rate and the net lease market are highly correlated,” Randy Blankstein, president of Boulder, tells GlobeSt.com. And during the third quarter, the ten-year treasury yield reached 2.06, its lowest level of the year, before ending the quarter at 2.33. That decline “has brought most investors back into the net lease sector and is one of the main contributing factors to cap rates declining.”
One sign that competition has increased is the spread between asking and closed cap rates, he adds. In the third quarter of 2017, this spread decreased by 14 bps to 21 bps.
While cap rates compressed among all of the net lease sectors, investors are still most likely to pay premiums for top-tier assets with long-term leases and credit tenants. However, “some investors seeking yield in a compressed cap rate environment have turned to shorter term leases or tenants with credit concerns if the underlying real estate fundamentals warrant the risk,” the report notes.
“The expectation by the majority of net lease participants is that the ten-year treasury rate will stay fairly stable over the next quarter,” Blankstein says. But the net lease market should remain quite popular for the rest of the year, especially with private and 1031 buyers, many of whom like the passive nature of the leases and appealing tax deferrals.
In the third quarter of 2017, 1031 and private buyers accounted for approximately 70% of single tenant retail transactions, according to Boulder, he adds. Furthermore, the 1031 and private buyer pool accounted for more than 85% of the transactions that were priced below a 6% cap rate, noticeably above the share they have typically held in the last few years.
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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.
