More Net Lease Properties Hitting the Market
The change in net lease property cap rates during the second quarter showed mixed results, with retail cap rates experiencing their greatest quarterly increase since 2011, while office and industrial rates compressed.
CHICAGO—The change in net lease property cap rates during the second quarter showed mixed results, with retail cap rates experiencing their greatest quarterly increase since 2011, while office and industrial rates compressed. According to The Boulder Group’s Second Quarter National Net Lease Report, the number of properties listed also increased significantly, as sellers look to sell assets before cap rates increase further.
“In general, it was a neutral quarter for the net lease industry as an increase in the supply of properties on the market balanced out a number of more positive forces,” says Randy Blankstein, president of Wilmette, IL-based Boulder. “The net lease sectors that demonstrated positive momentum included medical, quick service restaurants, dollar stores and grocery. That contrasts the sporting goods and banking sectors which experienced negative results.”
According to the new report, the average retail cap rate for net leased properties during the second quarter was 6.2%, an increase of 10 bps from first quarter 2018. The last time the rate increased by that much was the second quarter of 2011. The sector’s cap rates then went a long-term slide that eventually reached historic lows.
Conversely, second quarter industrial cap rates experienced further compression, sinking to 7.04% from 7.29%. That represents the sector’s lowest cap rate since The Boulder Group started tracking the net lease sector in 2004.
During the quarter, office cap rates also compressed, to 6.95% from 7.00%, that sector’s lowest cap rate since 2004.
In addition to the upward movement in cap rates, the number of net lease retail properties showed a sizeable increase during the second quarter, according to Boulder. The number of retail properties increased more than 13.6% to 4,216 properties nationally. Net lease office properties also showed a double-digit percentage increase, 12.1% to 538 properties. A 9.77% decline in the number of industrial net lease properties on the market softened the overall gain, which showed an increase of 11%.
According to Blankstein, in spite of cap rate increases for retail properties and new retail listings, investors remain bullish.
“While these recent increases can’t be overlooked, investment in retail net lease properties remains strong,” Blankstein says. “Investors look to relatively steady retail cap rates, in spite of a rising interest rate environment, and agree with the idea that the net lease retail sector is the beneficiary of the shift away from the traditional shopping mall.”
He points out that retail cap rates have fluctuated very little, between 6.10% and 6.25% for much of the last three years.
The report concluded that net lease investors generally expect cap rate stability, across all three asset classes. At the same time, investors will carefully monitor Fed monetary policy decisions along with the capital markets’ effect on pricing, in order to make necessary adjustments.