CHICAGO—Cap rates for net lease properties have been trending downward for more than five years, and recently sank to historic lows. But that long-term decline may be at an end. In the first quarter of 2016 cap rates for the single tenant net lease retail sector remained unchanged at their historic low rate of 6.18%, according to a report just issued by the Boulder Group, a net lease firm in suburban Chicago. However, during the same timeframe, cap rates for the office and industrial sectors increased 5 bps and 16 bps, respectively, to 7.25% and 7.26%.
“Cap rates will likely not go much lower unless interest rates fall further,” Randy Blankstein, president of Boulder, tells GlobeSt.com. He attributes the retail sector’s steadiness to strong demand from 1031 and private buyers. And the volatility of the capital markets was a contributing factor to the cap rate increases for the office and industrial properties.
Historically, institutional investors buy single tenant office and industrial assets; however, these “are more sensitive to the volatility of the financing markets in 2016 and have adjusted cap rates accordingly,” the company reports. “Throughout the course of the second quarter the 10 Year Treasury Yield ranged from as high as 1.94 and as low as 1.45.”
Underneath the overall rate stability, other changes are afoot. In the second quarter of 2016, the spread between asking and closed pricing increased for retail and office properties by 2 and 9 bps respectively. “Owners of net lease product have attempted to take advantage of the low cap rate environment over the course of 2016 with aggressive pricing,” according to Boulder. “The widening of the spread between asking and closed cap rates illustrates the cap rate pushback from buyers on the aggressively priced assets.” The company also found that the marketing time for single tenant properties has lengthened by about 11% when compared to the prior quarter.
The majority of net lease participants expect cap rates to hold steady for the near term; however, “the perception is that there is upward pressure on cap rates,” Boulder says. “With the recent events in Europe and the subsequent drop in the 10-year treasury, it is expected that volatility will increase for the near term.”