Single-Tenant Industrial Assets: Lower Cap Rates Get A Higher Estimation

A pair of Chicago-based brokerages have reported that all-time lows in cap rates for net leased industrial properties are a harbinger of greater demand for the property class.  In its Net Lease Market Report for Q1 2016, net lease commercial real estate firm Boulder Group has identified the see-saw linking low cap rates top high price points for net lease single-tenant industrial properties.

 From the report, authored by Boulder VP John Feeney:

Cap rates in the first quarter of 2016 for the single tenant net lease retail and industrial sectors reached a new historic low rate of 6.18% and 7.10% respectively. During the same timeframe, cap rates for the office sector increased by 20 basis points to a cap rate of 7.20%. Cap rates for retail assets continue to decline and trade at much lower cap rates than that of net lease office and industrial properties due to their preference amongst private and 1031 buyers. Private and 1031 investors typically pay lower cap rates than institutional investors, especially for retail assets. Private and 1031 buyers are more familiar with retail tenants, prefer the lower price points and understand the general business practices of these tenants when compared to industrial or office tenants […]

After the decision was made in the December Federal Reserve meeting to raise key interest rates, the 10 Year Treasury plummeted to its lowest point since February of 2015. Since that time, the 10 Year Treasury has trended upward, however remained lower than its sudden increase prior to the Federal Reserve’s decision to increase rates in December 2015. The net lease market is expected to remain active in 2016 as investor demand and allocated capital for this asset class remains strong. With the volatility of the 10 Year Treasury effecting capital markets, investors will be monitoring the capital markets and adjusting their bids accordingly. 1031 and private investors will be less effected by the volatility of the financing markets than institutional investors. This can be attributed to their acceptance of lower returns when financing or all cash closings due to their 1031 timing and tax consequences.

A NREIOnline post shows the same trend from a different perspective, that of investment sales company Stan Johnson Co. 

Stan Johnson reports that the average cap rate for the entire net lease market fell to 5.79 percent in the first quarter, from 6.24 percent over the past 12 months. The average price per sq. ft. went up about 10 percent, to $169.

The overall supply of product in the net lease sector declined by 3.0 percent since the fourth quarter of 2015, The Boulder Group reports, as new construction has remained limited.

“New construction properties are in the highest demand amongst 1031 and private buyers as they typically have the longest lease term,” the firm’s researchers write. “The limited supply has kept cap rates low for all three sectors despite the volatility in the 10-year treasury over the past year.”

Download a complete copy of NREI’s Net Lease Trends report here.

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