Randy Blankstein
In the fourth quarter of 2018 the net lease market shifted away from favoring sellers and moved into a more neutral stance. That quarter, the spread between asking and closed cap rates was 31 basis points, the largest since the second quarter of 2017, according to a new report by The Boulder Group. Furthermore, it reported that the same spread for short term leased properties with non-investment grade tenants was even greater at 51 basis points for the quarter.
There is a growing sense that the best of the sellers' market is over, Randy Blankstein, president and founder of The Boulder Group tells GlobeSt.com. This is not to say that great bargains can be had by buyers, he continues. “It's not a sellers' market anymore but not a buyers' market either. I would put it as the best pricing days are more more likely behind than in front of us.”
More Supply, Buyers Who Accept Risk
Still, there are bargains to be had for buyers willing to assume a certain level of risk. Namely, investors willing to take on the risk of shorter term leases or properties without investment grade tenants or strong residual real estate.
Sellers are starting to put more supply on the market although it is primarily their non-core assets, Blankstein says. This is one reason why Boulder Group expects cap rates to continue to rise; the other being the rising interest rate policy expected by the Federal Reserve.
Cap Rates Expected to Rise This Year
In a recent national survey conducted by The Boulder Group, the vast majority of active net lease participants expect cap rates to rise in 2019. The largest segment of net lease participants predict cap rates to increase between 25 and 49 basis points by the end of 2019.
Fed policy, though, appears to be somewhat in a state of flux and Blankstein points out that the survey was taken before the Fed's latest interest rate policy announcement.
“But certain things are a fact — we are in the late stage of the expansion and more properties are coming onto the market. So as long as supply numbers keep up, cap rates generally follow.”
All that said, investor demand for the net lease assets remains strong and the net lease market is expected to remain active in 2019, The Boulder Group said.
It noted that “as alternative investments including the stock market have experienced recent volatility, net lease assets perceived as the safest and most secure are still commanding historically low cap rates.”
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
