Net Lease Cap Rates Begin To Slowly Rebound From Historic Lows
Cap rates will likely continue to increase in Q4 -- but the question is by how much.
Net lease cap rates began rebounding from all-time lows in the third quarter, with average cap rates ticking up five basis points to 5.44%, according to NNNetAdvisors.
Cap rates for the sector are still at their lowest point in 12 years, however, and have been slower to respond to market conditions, the firm’s analysts say. The spread between the 10 year Treasury and medical cap rates hit a 12-year low in the third quarter, clocking in at 1.5%, a 280 basis point decrease from 4% a year ago.
“The decreasing margin between the costs of capital and net lease cap rate levels continues to put strain on the market and is resulting in both upward pricing pressure and decreasing sales volume,” analysts at NNNetAdvisors say. “Exchange buyers continue to be motivated, while institutional buyers do their best to either stay put or push pricing as far as they can. Many private buyers with dry powder continue to patiently wait out the net lease market for better buying opportunities as the current pricing for stocks, bonds, and other more liquid investments offer a less risky profile and higher short run returns.”
Average days on market increased by 8 days to 142 days during the third quarter, while the spread between asking and sales price increased “dramatically,” moving from 2.71% below asking price in Q2 to 4.29% in Q3.
Convenience stores, restaurants, auto-related, discount stores, and drug stores tended to follow general market cap rate trends in Q3, clocking either no increase or a slight increase in cap rates. With the drugstore sector, CVS and Walgreens properties are trading at similar cap rates as compared to Q2, while Rite Aid properties saw cap rates tick up to 7.7%, in line with historical trends for the brand. Bank properties were the outlier to that trends, with the volume of property sales decreasing and only top tier properties trading.
“As we move towards the last quarter of the year, the question seems to be how long will it take for the net lease market to react to rising interest rates,” the NNNetAdvisors report notes. “Other more liquid investment options continue to react in real time while many investors push to uncover net lease deals where the return and risk profile is in sync with their current expectations. We expect that cap rates will continue to increase in Q4, the only variable, will be by how much.”