Major Shift Towards Lower Credit Tenants

Cap rates in the net lease sector are at all-time lows. That statement (of the obvious) in and of itself is not a headline. The change in the mix of properties making up what is being sold today versus the last few years is, however, worth looking at. The properties that have been driving the ever lower cap rates are ironically the ones with less credit behind them. Indeed for each year 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/new construction by the higher rated tenants, such as banks and auto parts stores; while at the same time significant store growth by the lower rated tenants, such as the dollar stores.