A single-tenant Sonic ground lease at 3290 Olentangy River Road, Columbus, Ohio recently sold for $975,000

CHICAGO—Cap rates for the single-tenant net-lease market have sunk even below the historic lows they hit during the first quarter of 2013, mostly due to “the low-interest rate environment that existed in the first half of second quarter,” according to a new study by The Boulder Group, a commercial real estate firm in suburban Chicago. The cap rates for retail and office properties went down to levels not seen since 2006, while those for industrial ones were largely unchanged from the last quarter.    

Retail properties remain the most-sought after sector. Their rates hit 7%, a decline of 25 basis points since the first quarter. Rates for office properties decreased to 7.54%, a decline of 16 basis points, and industrials were at 8%, a decline of only 2 basis points.   

During the first quarter the supply of properties also declined, but this trend reversed in the second quarter. “The overall supply increased 14% across all three sectors for the first time in the previous five quarters,” the firm says. A total of 2,760 properties were added to the retail sector, an increase of 15.4% from the first quarter. Furthermore, 258 properties were added to the office market, an increase of more than 21%.

However, much of this expansion was the result of owners adding vintage buildings or properties with shorter leases to the market so they could take advantage of the low cap rates. In addition, many owners have been cutting shopping centers into single-tenant parcels to take advantage of the differences in cap rates between single-tenant properties and retail centers.    

“Transaction volume in the net lease market remains high as equity fundraising continues at a strong pace,” Boulder notes. A lot of capital is searching for somewhere to go and investors have increasingly sought properties with shorter leases, non-investment-grade tenants or have bundled small properties into portfolios to take advantage of economies of scale. “The excess capital raised has caused some significant mergers, acquisitions and large portfolio purchases recently in the net-lease market such as American Realty Capital Trust IV [and] American Realty Capital Properties’ $4.5 billion buying spree since May or the merger between Cole Credit Property Trust II and Sprint Realty Capital,” Boulder adds.