A La Petite Academy in Plainfield recently sold for $2.4 million

CHICAGO—Cap rates for the single tenant net lease retail market have sunk even below the historic lows they hit during 2013, according to a new study on the first quarter of 2014 by the Boulder Group, a commercial real estate firm in suburban Chicago. The cap rates for retail properties went down to 6.75%, a decline of 10 bps from the last quarter, when rates had hit the historic low of 6.85%. One year ago the retail rate stood at 7.0%.

“The main challenge facing investors is the limited pipeline of properties with long term leases to investment grade tenants in primary markets,” according to Boulder researchers. “After vigorous fund raising years and accommodating capital markets, investors are struggling to acquire assets that fit acquisition criteria while meeting return thresholds.”

Rates for industrials were at 8%, a decline of 15 bps, the same level as one year ago, a reflection of the stiff competition among institutional investors for properties in this sector. Office properties were the only sector that saw cap rates jump, from 7.4% during the last quarter of 2013 to 7.64% in 2014.

According to Real Capital Analytics, the US saw $44 billion of net lease transactions in 2013. And in the first quarter of 2014, owners have added a great deal of new product to the net lease market, with the biggest boost coming from the retailers. The supply of retail properties increased by 2,609, an increase of 19.46% over the 2,184 added in the previous quarter. The industrial sector had an additional 288 properties, up from 246 in the previous quarter.

“Owners of lower quality assets, with shorter lease term or limited credit, have added supply to the market to take advantage of the low cap rate environment as the consensus of net lease participants believe that the market strongly favors sellers,” according to the study.

Therefore, “despite the influx of supply, a lack of quality offerings remains in the single tenant market across all sectors.”