Triple Net Lease Cap Rates Drop Again

Michael Tucker mtucker@mba.org

April 16, 2018


Cap rates for triple net leased assets dropped 22 basis points in the first quarter to a new low 6.03 percent median cap rate, reported NNNet Advisors, Los Angeles.

The average cap rate fell 13 basis points to 6.23 percent, the company's First Quarter Net Lease Property Report said.

"As interest rates continue to raise steadily, the general consensus remains that cap rates will eventually follow suit," the report said. "As the cost of capital increases and cap rates remain the same or go lower, investor returns continue to get squeezed. Investors will eventually push back, and the question that remains is when."

NNNet Advisors cited four signs that indicate the market is at or near the bottom of this historically low cap rate period.

First, there is an increasing spread between sellers' asking price and the final sales price. In the first quarter properties traded at 7.03 percent under the asking price, up 32 percent jump over the prior quarter. "[This increased spread] indicates that seller's expectations have begun to exceed the threshold of what buyers are willing to pay," the report said.

Next, the spread between median net lease cap rates and the 10-year Treasury rate reached a record low 3.3 percent in the first quarter. This spread has steadily decreased since peaking at 5.8 percent in 2011.

Third, quick-service restaurants such as Kentucky Fried Chicken now trade at a record-low 5.3 percent cap rate on average--and that average falls even further if shorter-term deals with higher yields are not included. "While we understand that quick-service restaurants are in many ways the poster child of Internet-resistant tenants, we also believe that purchasing with a cap rate that starts with a 3 is a risk in and of itself," the report said. "Cash buyers are pushing this trend, as those looking to use debt are slipping into negative leverage territory on many of these transactions."

Average cap rates for restaurants with corporate credit fell to 4.94 percent in the quarter--NNNet Advisors' fourth sign that cap rate are close to historic lows. This figure includes both casual dining establishments such as Olive Garden and quick-service restaurants. "There has been no shortage of negative news in the casual dining sector, but the better locations continue to trade," the report said. "[Section] 1031 buyers continue to push this category as many are coming out of other property types and want the assurance of strong credit to ensure future cash flow."

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