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WILMETTE, IL—Asking cap rates for all property types—retail,industrial and office—in the single tenant net lease investmentsector moved lower for the second consecutive quarter.

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In its Third Quarter 2019 Net Lease Market Report, The BoulderGroup attributed this trend to a number of factors, including theFederal Reserve lowering interest rates.

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"Net lease is the bond equivalent in the real estate marketwhere you have a long-term lease and no vacancy because it's asingle tenant," Randy Blankstein, president of The Boulder Grouptells GlobeSt.com. "So, it's valued more on an income stream. Otherreal estate sectors are more speculative based on land values,occupancy and tenant renewal. Those are less stable and morevalue-add based. When you are cash-on-cash driven, the interestrate is the primary factor in determining your cash on cash. As a10-year treasury has dropped, people are willing to pay more forthese properties."

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Blankstein says there are factors beyond low rates drivinginvestors to net lease, primarily a large number of baby boomersentering retirement without enough savings.

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"The traditional investment vehicles have been bonds or otherconservative investments, but the yields aren't enough to givepeople the retirement that they envision for themselves," he says."Net lease has a higher return than bonds and is a little bit of adifferent risk profile. But if you invested through REITs or anETF, it [net lease] is a better yielding vehicle. So, I thinkthat's going to keep cap rates from moving too far up."

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The number of net leases properties on the market stayedremarkably consistent year over year. Last year at this time, therewere 5,235 properties available. Now, 5,230 properties are on themarket.

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"There just seem to be less sellers in the market today,"Blankstein says. "We're in year eight of the recovery and a lot ofthe people who were turning in a quick profit have done so at thispoint. So, I think it has stabilized from a supply-demandimbalance."

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Even with a stabilized supply-demand situation, Blankstein seessome net lease investors taking on more risk with cap rates at suchlow levels. As an example, he points to the narrowing spread of 30basis points between primary, secondary and tertiary markets.Traditionally, he says spreads have been 60 to 80 basis points.

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"I think people are overpaying for some of the secondary andtertiary markets at this point," Blankstein says. "With the smallerspreads, I'd rather buy primary markets at this point in the cycle.You might as well choose the best market because you're not reallygetting paid enough [to take the risk]."

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If investors are staying in primary markets, they have beenchasing speculative credits. "You see people chasing secondarynames like Rite-Aid, Tesla and Applebee's," Blankstein says. "Theyare high yield, but they are still in primary markets and you'retaking some credit risk."

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Leslie Shaver

Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.