By Randy Blankstein, President, The Boulder Group
Cap rates for the single-tenant net lease retail sector remained unchanged in the first quarter, sustaining their historic low rate of 6.18 percent. During the same timeframe, cap rates for the office and industrial sectors increased to 7.25 and 7.26 percent, respectively. While cap rates remained stable in the second quarter, an influx of net lease assets entered the market, increasing the total supply by approximately 11 percent.
Cap rates in each of the major sectors remained unchanged or increased in the second quarter. While the strong demand from 1031 and private buyers kept retail cap rates firm, the volatility of the capital markets was a contributing factor to office and industrial increases. Historically, institutional capital has been the buyer for these assets; however, institutional investors have been more sensitive to the volatility of the financing markets in 2016, and have adjusted cap rates accordingly. Throughout the second quarter, the 10-year Treasury yield ranged from as high as 1.94 to as low as 1.45.
Despite cap rate stability in the second quarter, the spread between asking and closed pricing increased for retail and office properties by two and nine basis points, respectively. Owners of net lease product have attempted to take advantage of the low cap rate environment over the course of 2016 with aggressive pricing. The widening of the spread between asking and closed cap rates illustrates the cap-rate pushback from buyers on the aggressively priced assets. As a result, the marketing time for single-tenant properties has lengthened by approximately 11 percent when compared to the prior quarter.
The net lease market is expected to remain active in 2016, as investors continue to seek safe and stable returns. The majority of net lease participants expect cap rates to hold steady for the near term; however, the perception is that there is upward pressure on cap rates. With the recent events in Europe and the subsequent drop in the 10-year Treasury, volatility is expected to increase for the near term.