July 12, 2017
Single-tenant net lease sector cap rates increased across all asset classes in the second quarter, reported Boulder Group, Northbrook, Ill.
Cap rates for retail and office properties increased three and two basis points to 6.23 percent and 7.14 percent respectively, Boulder Group Vice President John Feeney said. Cap rates for net lease industrial properties increased 10 basis points to 7.37 percent.
Feeney said despite widespread expectations of instant cap rate expansion due to the Federal Reserve’s recent interest rate increases, there was no immediate effect on cap rates. “In fact, after announcing three rate hikes since December 2016, the 10-year treasury yield declined since the beginning of 2017,” he said.
The spread between asking and closed cap rates widened across all three sectors in the second quarter, Boulder’s Net Lease Market Report said. The spread increased 6 basis points for both the net lease retail and industrial sectors to 35 and 32 basis points respectively. The spread in the net lease office sector increased 5 basis points to 31. “After years of the market being perceived as more favorable to sellers than buyers, the widening spread combined with a change of investor sentiment has shifted the market back to neutral,” the report said.
Despite the negative press surrounding brick-and-mortar retail, most retail failures occurred outside of the single-tenant realm, Feeney noted. “The problem tenants and product types have largely been isolated to department stores and tenants frequently located in enclosed shopping malls,” he said. “As a result, the net lease market is benefitting as capital continues to enter the net lease market.”
Feeney said the net lease market remains active with both 1031 Exchange and private investors due to the “stable and predictable” investment returns the net lease asset class can provide.
“The net lease market is expected to remain active in 2017 as investors continue to favor this asset class,” Feeney said. He noted the potential Walgreens-Rite Aid merger was called off in late June and said Walgreens plans to acquire 2,186 stores from Rite Aid. “Following a year of gridlock associated with the merger, pharmacy transaction volume should experience a surge as the uncertainty surrounding this transaction has ended,” he said. “With continued upward pressure on interest rates, investors will be carefully monitoring the capital markets as the majority of net lease participants expect cap rates to increase in the coming year.”
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