Cap Rates Rise for Net Lease and Industrial

Cap rates in the single-tenant net lease sector rose slightly in the second quarter after hitting historically low levels in the previous quarter, according to the 2nd Quarter Net Lease Research Report from Boulder Group.

Industrial cap rates increased by 18 basis points to 6.89%. Single-tenant retail cap rates increased by 11 basis points to 6.02%, while office cap rates remained unchanged in the second quarter. The number of properties on the market decreased 3.94% for retail and 2.43% for office compared to Q1 2021. It rose 6.36% for industrial. The median national asking versus closed cap rate spread declined 4% for industrial and 2% for retail. It rose 4% for office.

Randy Blankstein, President of The Boulder Group, attributed the cap rate increase to the increased concentration of lower-quality assets. Overall, there was a 3% decrease in the supply of net lease assets. However, assets with short-term leases and less desirable tenant credits made up a more significant concentration of the market in the second quarter.

Part of the reason these assets hit the market was because owners finally found an opportunity to sell.

“There is a window of opportunity for things that you just couldn’t put on the market last year because of COVID and because of where the market was,” Blankstein tells GlobeSt.com. “If you have a McDonald’s and it went out two weeks ago, it had 14 offers. So things like Rite Aid’s and daycares are coming back. But the more Rite Aids you put out, the higher cap rates go.”

Jimmy Goodman, a partner at The Boulder Group, says only 22% of the property supply had more than 15 years of lease term remaining. Demand for those more desirable assets, such as McDonald’s, 7-Eleven and CVS, remained strong. With that competition, cap rates compressed for those assets. The bid-ask spread for net lease retail and industrial assets in Q2 decreased by 2 and 4 basis points, respectively.

John Feeney, senior vice president of The Boulder Group, says the competition is forcing some investors to seek alternatives in net lease. With strong demand for net lease assets, The Boulder Group thinks there will be a boost to liquidity for more speculative investments.

“At the end of the day, it’s still a good fundraising environment,” Blankstein tells GlobeSt.com. “So you’re able to get a lot of people who are looking for yield. When you fundraise, people have the expectation that you have deal flow and have a pipeline and can put the money out. So all of the money that has been raised will get placed.”