Even as Supply Drops, Net Lease Deals Are Closing

The spread between asking and closed cap rates for retail and office properties widened by 6 and 2 basis points respectively.

Jimmy Goodman is a partner at The Boulder Group and will be a speaker at the upcoming GlobeSt Net Lease national conference in New York City.

NEW YORK CITY—Cap rates in the single-tenant net lease sector reached historic lows across all three main sub-sectors including retail, office and industrial. That is according to Jimmy Goodman, partner at The Boulder Group. Goodman will serve on the state of the industry panel at the upcoming GlobeSt. 18th annual national net lease conference in New York City.

According to Goodman, single tenant retail reached a previous historic low from the fourth quarter of 2017 at 6.07%. “Net leased office and industrial properties reached new historic lows of 6.94% and 6.90% respectively,” he tells GlobeSt.com. “Cap rates remain at low levels due to the historically low interest rate environment combined with a robust economy.”

Despite the decrease in cap rates, he says, the spread between asking and closed cap rates for retail and office properties widened by 6 and 2 basis points respectively. “Real estate investors believe we are in the late stages of the real estate cycle with fewer buying opportunities, especially those of high quality.” In the fourth quarter of 2019, he explains, the net lease market experienced a decrease in property supply of approximately 10%. “Regardless of the decrease and limited quality supply in the fourth quarter of 2019, transaction volume for 2019 is expected to surpass 2018 by a significant margin.” That, he says, is driven by a fundraising environment for cash flow vehicles with returns that exceed corporate bonds.

As for what to expect in 2020, Goodman tells GlobeSt.com that there is some uncertainty surrounding the economy and upcoming presidential election, which he says is creating differing forecasts for the net lease market.

In a recent national survey conducted by The Boulder Group, 45% of active net lease participants expect cap rates to rise in 2020 while 33% expect cap rates to decrease. The minority expects cap rates to remain relatively stable, the survey said.

The same poll in the fourth quarter of 2018 showed less than 5% of participants expected cap rates to remain the same or decrease in 2019.

“Investor demand for the net lease sector should remain active throughout 2020,” Goodman explains. “Following a year with voracious transaction velocity in the second half, expectations are for that pace to continue into 2020.”

The 18th GlobeSt Net Lease Conference (formerly a RealShare Event) will bring together the industry’s most influential and knowledgeable real estate executives from the net lease sector. To hear more from Goodman and gain insights from other experts in the space and prepare your transactions & investments for continued success, click here to register.