NNNet Advisors: Squeeze on Net Lease Investors Continues
Michael Tucker firstname.lastname@example.org
Cap rate compression in the single-tenant net lease sector continued in the third quarter as both median and average cap rates reached record lows, reported NNNet Advisors, Los Angeles.
The median cap rate fell 17 basis points to 6.01 percent and the average cap rate fell 21 basis points to 6.19 percent, the firm said. Properties with more than 10 years remaining on the base term traded at an even lower 5.8 percent average cap rate, surpassing the previous low set in third-quarter 2015.
"Investors generally expected 2017 to show some relief in the form of cap rate increases, but the opposite scenario has played itself out," NNNet Advisors' Net Lease Property report said.
The spread between median cap rates and the 10-year Treasury dropped back down to its recent low of 3.7 percent, NNNet reported. "Investors continue to lock in lower interest rates in the short run and accept the long-term exposure of acquiring property at historically low cap rates," the report said.
As cap rates compress, properties with fewer than 10 years remaining on their lease have started to take on a more important role in the current market, NNNet said. "While they are generally harder to finance aggressively, if at all, they are often a source of higher cap rates," the report said. "Investors that are able to make acquisitions without financing have continued to focus on these shorter-term deals in search of yield."
Compensating factors that investors focus on for these shorter-term properties include replacement cost, unit level performance, demographics and relationships with the tenant, NNNet noted. "We expect this trend to continue while the premium paid for longer-term deals remains above historic norms," the report said.
The restaurant sector experienced cap rate compression across the board, NNNet noted. Restaurant property cap rates decreased 25 basis points from the prior quarter. Quick-service restaurant properties remained the most sought-after restaurant properties. McDonald's restaurant cap rates fell to 4.43 percent and Wendy's to 5.49 percent.
Single-tenant net lease drug store cap rates showed mixed results, NNNet said. CVS cap rates remained in the 5.8 percent to 5.9 percent range. Walgreens crept back into the low 6 cap range. "Drug stores remain in favor for investors due to strong credit and long base terms," the report said. "[But] investors that are seeking out rental growth still avoid these properties due to their mostly flat leases. We expect demand to remain constant for this product type throughout the near future."