Retail, Office Cap Rates Rise in Q2
Consequently, transaction volume in the second quarter of 2022 was down approximately 15%.
Inflation has finally pushed cap rates in the single tenant net lease sector to increase, with cap rates ticking up by five basis points for retail and by seven basis points for the office sector in the second quarter. Cap rates for single tenant industrial, meanwhile, remained unchanged from Q1, according to the Boulder Group.
The recent series of rate hikes by the Federal Reserve and rising inflation led to increased borrowing costs, pushing up cap rates. The June hike of 75 basis points was the Fed’s largest since 1994, while the 10-year Treasury yield surpassed 3%, hitting 3.5% mid-month. This “created a pause for some net lease investors looking to acquire assets at higher cap rates,” Boulder Group analysts said.
“Some sellers may choose to hold assets versus a sale given a decline in value,” adds Jimmy Goodman, Partner, The Boulder Group. “Consequently, transaction volume in the second quarter of 2022 was down approximately 15% when compared to the same time period in 2021.”
Higher-priced properties faced more cap rate pressure, while lower-priced net lease properties saw less impact in pricing, most likely due to more cash purchasers lining up for those deals. CMBS lending remains volatile, Boulder Group analysts said, but rising rates also constrained loan proceeds and limited loan-to-value.
“Transaction activity will remain dependent on the velocity of 1031 buyers motivated by tax consequences and seller’s willingness to move to pricing that meets non-1031 buyer’s return thresholds,” they said, noting that cap rates will likely face continued upward pressure as additional rate hikes materialize this year.
That comports with a recent analysis from Moody’s, which predicts “some moderate bump” in cap rates across other property types in the near-term.
“There are strong opinions in the market both ways, that cap rates will go up significantly with rising rates, and others saying that cap rates will go down, and demand and expectations of rent growth will compress risk premiums,” said Kevin Fagan, head of CRE Economic Analysis for Moody’s Analytics. “We have taken a measured approach in our forecasting, trying to find a balance between demand for the sector with upward pressure from rates.”