CHICAGO—Cap rates for the single tenant net lease properties slid down in the third quarter, continuing a long-term decline that has now lasted nearly five years. As more investors entered the competition for properties, the retail and office sectors reached new historic lows of 6.25% and 7.25% respectively, and the industrial rate fell slightly to 7.59%, according to a new report from the Boulder Group, a net lease investment brokerage firm located in suburban Chicago.

“The net lease sector as a whole is becoming more popular,” Randy Blankstein, president of Boulder, tells GlobeSt.com. He attributes much of this popularity to demographics. A lot of people are on the verge of retirement and have started looking for investments which promise higher yields than bonds, and net lease retail properties are especially well-suited for this group.

The office and industrial properties tend to be too large and pricey, generally more than $10 million, making them more suitable for institutional investors, Blankstein adds. Furthermore, net lease retail properties are usually well-known brands such as McDonald's or Dunkin' Donuts, and that provides a lot of comfort to smaller private and 1031 investors. Cap rates for net lease retail properties declined by 15 bps in the third quarter, the largest decline since the second quarter of 2014.

The Boulder report also notes that “despite the decline in asking cap rates for retail assets to a new historic low, the spread between asking and closed cap rates remained the same as the previous quarter,” or about 18 bps. Blankstein says this is a bit of a surprise since there are a significant amount of lower-quality properties now hitting the market. The owners of these properties, however, have priced them too aggressively, and “the ones that are trading are the higher-quality ones.”

Buyers continue to go after newly-built properties that have long-term leases with investment-grade tenants. And the development pipeline in the third quarter slowed compared to the first half of 2015, increasing competition for the best offerings. “Accordingly, cap rates for recently constructed properties tenanted by 7-Eleven, Bank of America and Family Dollar compressed by 32, 25 and 65 bps, respectively, in the third quarter,” Boulder notes.

Company officials expect that the net lease market will remain active through the end of 2015. And even if the Fed raises interest rates the market should continue to draw a lot of notice. “As interest rates start to rise, cap rates will have to move up as well,” Blankstein says, but considering the demographic pressures and the need for so many to plan for upcoming retirements, “a slight uptick in interest rates won't have that much impact.”