Office cap rates, meanwhile, increased by 5 basis points to 6.95 percent due to general concerns regarding office utilization following the pandemic.
Cap rate compression for industrial assets can be best attributed to investor demand for secure cash flow streams. Following record transaction volume in 2019, 2020 experienced a significant decline in net lease transaction volume of approximately 11 percent, which was largely caused by the pandemic.
Despite a 9 percent increase in net lease property supply in the first quarter of 2021, there remains a lack of high-quality assets with long-term leases in the net lease market. Accordingly, owners of lower-quality assets brought properties to the market in an attempt to take advantage of the compressed cap rate environment.
The limited supply of high-quality assets created increased competition amongst investors, and the competition maintains a low cap-rate environment despite the recent uptick in the 10-year treasury yield.
As the effects of COVID-19 continue to surround the net lease landscape, many passive investors have shifted their focus to credit tenants. Accordingly, viable tenants in the office and industrial sectors represent some of the lowest cap rates. In the first quarter of 2021, FedEx and Fresenius cap rates were 5.90 percent and 5.60 percent, respectively, for assets that were recently constructed.
Transaction volume in the net lease sector should remain active, especially as optimism increases following the economy’s recovery from COVID-19. 1031 and private capital investors will continue to seek assets with long-term leases, strong tenants and top metro locations, causing cap rates for these assets to remain low. Investors will be carefully monitoring the economy as it recovers from the pandemic, combined with the impact of multiple rounds of stimulus.
Randy Blankstein is the president of net lease advisory firm The Boulder Group.