Recent Fed Reserve Policy Changes Bolstering Net Lease Investment Market
Specifically, the retail sector experienced the greatest cap rate compression by four basis points to 6.23%. Moreover, this was the first quarter of downward cap rate movement for the retail sector following five consecutive quarters of upward movement.
WILMETTE, IL—The Boulder Group reports that the recent policy changes by the Federal Reserve have sparked renewed optimism among net lease property investors based on decreasing cap rates, and the narrowing bid-ask spread in the asset class.
In its just released 2Q2019 Net Lease Market Report, The Boulder Group states that cap rates for the single tenant net lease sector have decreased across all three major sectors—retail, office and industrial properties—in the second quarter of 2019. The Boulder Group Report predicts that cap rates in the net lease sector should experience downward pressure, but remain relatively stable throughout 2019.
Specifically, the retail sector experienced the greatest cap rate compression by four basis points to 6.23%. Moreover, this was the first quarter of downward cap rate movement for the retail sector following five consecutive quarters of upward movement. Cap rates in the office and industrial sectors compressed by three basis points and one basis point respectively.
“As a rule, the net lease market, particularly retail properties, is closely related to investment returns and, by extension, the work of the Federal Reserve,” says Randy Blankstein, president of Wilmette, IL-based The Boulder Group, an investment firm specializing in net lease properties.
After 2018 actions in the Federal Reserve’s Monetary Policy that saw three rate increases, The Boulder Group expects a rate cut at the Fed’s upcoming July meeting.
A majority of prognosticators expect at least one additional cut in the near future, the firm adds. Based on current Fed activity, at the end of the second quarter of 2019, the 10-year Treasury was 2.00% after reaching levels as high as 3.24% in the past 12 months.
As the retail industry continues to evolve, investors of net lease retail properties are putting greater emphasis on tenant credit quality and lease length. “With many investors believing we are in the late stages of the real estate cycle, investors are somewhat more narrowly focused, targeting properties that can withstand a recession or uncertainty in the market,” Blankstein says. “For example, on an individual property/brand basis, newly constructed 7-Eleven properties experienced the greatest quarter over quarter cap rate compression of 12 basis points to 4.88%.”
With downward pressure on cap rates in all three sectors, the spread between asking and closed cap rates saw a decline when compared to the prior quarter. Jimmy Goodman, partner at The Boulder Group, adds, “The narrowing of the bid-ask gap illustrates the current competitive marketplace for net lease properties as investors, both private and institutional, seek safe and stable returns.”
“With all of these factors in place,” Blankstein and Goodman say, “Investor demand for the net lease market likely will exceed transaction volume that was forecasted in early 2019; we’ll see sale velocity increasing as the year progresses.”
Blankstein adds, “Net lease property investors will carefully monitor the capital markets and the effect on pricing as the market expects multiple rate cuts from the Federal Reserve in 2019 and potentially 2020.”