This CVS in Tysons Corner sold for $24 million with a cap rate of just 4.97%.

CHICAGO—Cap rates for single tenant net lease retail properties have sunk yet again, continuing a plunge that began roughly three years ago, according to a new study on the second quarter by the Boulder Group, a commercial real estate firm in suburban Chicago. The cap rates for retail properties went down to 6.5%, a decline of 25 bps from the last quarter, when rates had hit an already historic low of 6.75%. One year ago the retail rate stood at 7.0%.

“The retail sector experienced the third straight quarter of historically low cap rates as a result of increased demand and the continually growing investor pool seeking the stable yield of the asset class,” according to Boulder researchers. “Retail net lease assets remain the most desired property type in the net lease market as evidenced by the cap rate premium of 127 and 147 bps over the office and industrial sectors respectively.”

Rates for industrials were at 7.97%, a decline of only 3 bps, roughly the same level as one year ago. Office properties were the only sector that saw cap rates go up significantly, from 7.64% during the first quarter to 7.77%, the second consecutive quarter that the rate increased. Boulder attributes this “to the residual concern of ongoing vacancy challenges facing the suburban and secondary office markets.”

The spread in cap rate premiums between retail and the office and industrial sectors is the largest spread in fifteen years. According to Boulder, “investors favor retail assets as they typically have longer initial lease terms and investors have a familiarity with the tenants and a preference for the typical passive nature of the leases.”

As reported in, for example, in June a CVS in Tyson’s Corner, VA sold for over $24 million. It has 25 years remaining on its lease and a cap rate of just 4.97%, perhaps the lowest rate ever for a CVS in that price range. And a Whole Foods in Park Ridge, IL, a suburb of Chicago, has 20 years remaining on its lease and sold in April for $16.6 million with a cap rate of 5.13%.

Owners have been adding a great deal of new product to the net lease market. The supply of retail properties increased to 3,058, a 17.2% boost over the first quarter. And the industrial sector had 210 properties, up from 177 in the previous quarter. The increase in office properties was more modest, but did increase from 288 to 304.

However, the increase in supply, a 16% boost overall, may be a bit deceptive. Offerings that involve investment grade tenants with long-term leases remain rare. And most buyers “acquiring low cap rate properties, including 1031 exchange investors, are seeking new construction assets with investment grade tenants,” according to Boulder. “For example, newly constructed Walgreens, Chase Bank and 7-Eleven properties experienced cap rate compression of 10, 25 and 25 bps respectively.”

And the influx of individual buyers looking for the stable yields in these sectors may start crowding out the big institutional buyers, Boulder concludes. In fact, “leading global net lease REIT W.P. Carey has decided that the valuations of net lease assets are no longer attractive and is accordingly moving to other sectors. The expectation is for some other institutions to follow as valuations are well above historic levels and competition among private investors continues to drive prices.”