Retail Single-Tenant Net Lease Cap Rates at Record-Lows

Tucker, Michael mtucker@mba.org

October 19, 2016


Single-tenant net-lease cap rates for retail properties reached a record-low 6.10 percent in the third quarter, reported Boulder Group, Northbrook, Ill. 

STNL cap rates for the office and industrial sectors also decreased to 7.08 percent and 7.14 percent, respectively, said Boulder Group Vice President John Feeney. 

"The overall net-lease market remains active with 1031 and private investors due to the passive nature of the leases and attractiveness of relative investment returns when compared to other asset classes," Feeney said.

Feeney noted that uncertainty in some other investments compared to the stable yields generated by the single-tenant sector created "abundant" investor demand for STNL properties. 

"Despite a slight rise in the supply of net-lease properties, there is a lack of new construction properties with long-term leases," Feeney said, noting that cap rates for recently constructed properties tenanted by McDonalds, DaVita and Advance Auto Parts compressed by 30, 25 and 15 basis points, respectively, during the third quarter. "This accounted for the greatest retail tenant compression." 

While newly constructed assets remain in high demand and limited supply, dollar store tenants continue to expand and add new construction to the market, Boulder Group reported.

"The dollar store sector remains to be one of the sectors with increasing cap rates despite the current low cap rate environment due to their large supply on the market," Feeney said. "However, these assets remain in demand with investors who have 1031 exchanges with small equity requirements due to their low price points and long-term leases with creditworthy tenants."

Feeney predicted that the net-lease market should remain active throughout the remainder of the year and that cap rates should hold steady for the near term, as institutional and fund investors attempt to reach fund allocations by year end.

Share this article