CHICAGO-Cap rates for net lease retail properties around the country barely budged in the first quarter, and will likely stay flat at about 7.75% for the rest of the year, according to the locally based Boulder Group. Investors want the choice core properties, but a flood of lower-quality sites has hit the market, and may spur riskier behavior, according to the study.

Banks, drugstores such as CVS and Walgreens and government-occupied properties experienced cap rate compression of 15, 30 and 23 basis points respectively in the first quarter, in part because of the availability of tenant lease financing, according to the study. However, 2,976 retail net lease properties were added to the market in the quarter, almost a 20% increase from Q4 2010.

“That’s what’s keeping the cap rates flat,” Boulder president Randy Blankstein tells GlobeSt.com. “There just isn’t much core available, it’s a bifurcated market. Investors are going to move into shorter term properties with secondary credit, with higher risk.”

Higher interest rates may already be forcing investors into higher return territory, such as the 10-Year Treasury Rate going up to 2.39% in March. If interest rates continue to increase, cap rate compression could suffer worse than since Q2 2011.

New development will remain limited throughout 2012, he says. “While there may be some new dollar stores and banks, there’s just too much need to fill vacant boxes such as Borders,” Blankstein says.

Instant Insights /

Net Lease Cap Rates Likely to Remain Flat

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