Single-Tenant Net Lease Cap Rates Largely Stable

Michael Tucker mtucker@mba.org

January 03, 2019


Single-tenant net lease cap rates remained mostly unchanged in the fourth quarter, reported Boulder Group, Northbrook, Ill.

Cap rates for office net lease assets increased two basis points to 7.02 percent. Industrial asset cap rates increased five basis points to 7.07 percent. Single-tenant net lease retail sector cap rates held steady at 6.25 percent during the quarter, the company's Net Lease Market Report said.

Boulder Group Vice President John Feeney noted invests expect cap rates will likely trend upward this year as the Federal Reserve continues to tighten monetary policy. Nearly half of net lease participants surveyed predicted cap rates will increase between 25 and 49 basis points by the end of the year. Nearly one-third predicted cap rates couuld move up between 1-24 basis points and 14 percent predicted a 50 basis point or greater increase. No market participant surveyed predicted that cap rates will drop this year.

"The majority of property owners believe we are in the last stages of the current real estate cycle," Feeney said. "Accordingly, property owners are supplying the current market with their non-core net lease holdings in order to take advantage of the historically low cap rate environment." He said the net lease sector saw a nearly seven percent supply increase during the fourth quarter as a result of owners looking to sell.

Feeney said the net lease market has strongly favored sellers in recent years, "but the market has shifted into more of a neutral position," he said. The spread between asking and closed cap rates grew to 31 basis points in the fourth quarter, the largest spread since second-quarter 2017.

"Furthermore, the same spread for short-term leased properties with non-investment grade tenants was even greater in the fourth quarter," Feeney said. "Investors who are willing to take on the risk of shorter-term leases have been able to take advantage of this shift. Properties with short-term leases and without investment-grade tenants or strong residual real estate had the greatest change in cap rates in the current rising-rate environment."

The report said investors see net lease assets as safe and secure investments, especially now that competitive investments including the stock market are seeing increasing volatility. 

"Investor demand for net lease assets remains strong and the net lease market is expected to remain active in 2019," the report said. "However, the projection is that there will likely be upward movement in cap rates moving forward."

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