Cap rates in the net lease sector are at all-time lows. Thatstatement (of the obvious) in and of itself is not a headline. Thechange in the mix of properties making up what is being sold todayversus the last few years is, however, worth looking at. Theproperties that have been driving the ever lower cap rates areironically the ones with less credit behind them. Indeed for eachyear over the past three years, the proportion of tenants rated A-or better has steadily decreased.
A major reason for this has been limited expansion/newconstruction by the higher rated tenants, such as banks and autoparts stores; while at the same time significant store growth bythe lower rated tenants, such as the dollar stores.
We have seen record cap rate compression in the STNL marketdespite properties being less credit worthy as a whole. The chartbelow illustrates the magnitude of this shift.
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