Net Lease Cap Rates Reach Unprecedented Level

By Randy Blankstein, President, The Boulder Group

Cap rates in the net lease sector remained near unprecedented levels across retail, office and industrial sectors through the third quarter of 2012. Cap rates for net leased office properties declined slightly while cap rates net lease industrial rose slightly and net lease retail properties remained unchanged.

The primary factor contributing to the stagnation of cap rates for retail properties can be attributed to the plateau of investor yield thresholds as cap rates remain near historic lows, especially for newly constructed properties. Furthermore, the ten year treasury ceased its decline from the previous quarter after reaching its lowest point of the year in mid-July. The recent increase in the ten year treasury had limited effect on cap rates due to the limited supply of newly constructed properties and increased demand throughout the sector. Older properties with less than fifteen years of lease term have experienced increased investor interest as high yields can be achieved. Older drug store properties with strong sales performance have experienced the most activity as they offer strong real estate and retail fundamentals. For example, the increased demand for Walgreens properties constructed from 2000-2004, which typically have higher yields, has caused cap rates for these properties to decline by 50 basis points in comparison to a year ago.

Supply continues to be limited by the constricted development pipeline and a limited existing supply of long term leased properties. The net lease market experienced a 7.8% decrease in supply for all three property sectors in the third quarter of 2012, which has increased competition amongst net lease investors for quality assets. As a result, the national bid ask spread compressed by six basis points on average in the third quarter of 2012. Accordingly, the average marketing time for net lease properties has decreased by 20% over the past twelve months as well.

The national single tenant net lease market remains active as institutional investors seek to hit acquisition goals by year end. As many property owners anticipate increased tax rates in 2013, there has been a recent addition to supply with owners seeking year end closings. As cap rates remain near historic lows and construction supply diminished, the market should remain favorable to sellers for the remainder of the year.