Net Lease Cap Rates Continue Upward Trend

Michael Tucker mtucker@mba.org

October 18, 2018


Single-tenant net lease property cap rates continued their upward trend in the third quarter, gaining eight basis points, reported Calkain Cos., Herndon, Va.

The trend shows no sign of abating, Calkain said. "If anything, as investors begin to turn their focus to the fourth quarter and 2019, we see interest rate growth outpacing that of cap rates in the short run until an acceleration in cap-rate increases over the next few months."

But Calkain President and CEO Jon Hipp said the firm expects only "moderate" cap rate growth. "Although we've seen an uptick in interest rates, the market continues to aggressively chase net lease assets," he said. "I'm cautiously optimistic we will have a solid fourth quarter."

The report cited some question marks that could possibly harm the sector, including the coming mid-term elections, inflation and the possibility of a mid-2019 correction. "[But] most experts agree, these are non-issues for the coming year and will have little to no effect on the cap rate trajectory," Calkain said.

The net lease market remains on track for continued strong performance, Calkain said. "There is an equilibrium between buyers and sellers, even as more new investors enter the field," the report said. "Buyers do what they always do: they push on pricing, and there is enough inventory out there for selectivity in their choices but without a dangerous overstock."

As usual, different sectors performed very differently in the third quarter. Casual dining sector cap rates fell 12.1 basis points to 6.34 percent, driven by an increase in lease years and more ground leases. Convenience stores saw a 3.8 basis point compression. Quick-service restaurants have seen an influx of new investors, attracted both by low price points and a model that many consider "Amazon-proof," Calkain said.

"Building on cap rate performance year-to-date, the major trend for the coming months will be accelerated but still remain a moderate rise, driven by the interest rate environment," the report said. "Concerns beyond those that are market-specific appear to be non-issues. In all, the investor reaction to the dynamics of the current marketplace, from the rise in cap rates, interest rates and the T-bill to the interplay of web-based sales and brick-and-mortar, is cautious optimism."

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