Net Lease Volume Ticks up With These Four Sectors Performing Best

The pandemic is still with us, but the markets are beginning to absorb what is tiringly called the “New Normal.” Avison Young’s Third Quarter Cap Rate Report reveals as much, pointing to an increase in net lease activity by 13.8 percent over the previous quarter, reflecting a 40-deal jump. Of course, we’re watching the current resurgence in COVID-19 cases for indications that the disease will once again impact market activity.

Meanwhile, however, the market reflects the current economic rally, if that’s not too strong a word. Cap rates have risen only minimally throughout the year, probably a reflection of investor focus on those sectors they felt were most stable. In the third quarter, that meant Automotive, Quick-service restaurants, Pharmacies and Dollar stores.

Breaking that down, the Automotive sector saw a cap rate hike of 21.2 basis points (bps) to 6.5 percent on 37 deals tracked. Ninety-one QSR trades in the quarter saw cap rates drop slightly, from 5.72 percent to 5.61 percent. Ditto Pharmacies, which dipped only 0.6 bps—to 6.30 percent–on 56 deals. Finally, Dollar Stores, always a strong performer, went from a second quarter cap rate of 7.11 percent to 6.93 percent, an 18.5-bp change, based on 75 transactions. All of the above sectors enjoyed lease terms north of 11 years.

It should be noted that all of those sectors experienced increases in deals over the third quarter. But the bellringer here was QSR, which leaped quarter-over-quarter from 49 to 91 deals.

By contrast, activity in the Bank, Convenience store and Medical asset sectors continued its “Year of the Pandemic” decline, totaling a paltry 19 deals in all—with Medical bringing up the rear with only one trade. Third quarter cap rates hit 7.59, 5.68 and 6.2 percent, respectively. What’s more, the Education and Big Box sectors have seen no activity at all for fully two quarters now.

Taken as a whole, the average overall net-lease cap rate rose slightly from 6.36 percent to 6.56 percent, a 20.4-bp hike, with the average lease term hovering just shy of 13 years. While cap rates are up slightly, they remain within historical norms. But, we should note, spreads with the 10-Year Treasury are still at record highs.

In all, this is an odd year to say the least, amplified by the ongoing (and growing) threat of a pandemic resurgence and, until the beginning of November, the presidential election, which always creates some agita for risk-averse investors. Those uncertainties, coupled with the question-mark of 1031 exchange rules, are all being reflected in investor behavior.

If there’s good news here, it comes with the ongoing pressure of sidelined capital. The introduction of a vaccine, of course, would blow the markets wide open. In the meantime, as we close out 2020, we can see a renewed flurry of activity.