Single-Tenant Net Lease Cap Rates Fall Again

Michael Tucker mtucker@mba.org

October 04, 2019


Single-tenant net lease cap rates fell across the board in the third quarter, reported The Boulder Group, Wilmette, Ill.

The sector saw cap rates drop in all three categories in the second quarter as well.

Cap rates in the single-tenant net lease retail sector decreased two basis points to 6.21 percent during the third quarter while office sector yields decreased seven basis points to 7.00 percent. The industrial sector saw a four basis point decrease to a record low 6.95 percent "from limited supply and the continued growth of e-commerce," said Boulder Group Senior Vice President John Feeney.

"The decrease in cap rates can best be related to the Federal Reserve's monetary policy objectives," Feeney said in Boulder's Third Quarter Net Lease Market Report. "Following the recent rate cut provided by the Federal Reserve in early September, most prognosticators expect one additional cut in the prior to year-end. The current monetary policy has increased the buying power of investors due to favorable cost of capital and debt terms."

The 10-year Treasury yield started the third quarter at 2.03 percent but bottomed out in September at 1.46 percent, the report noted.

Some net lease investors are shifting their focus to "atypical" investment strategies despite the low cap rate environment, Feeney said. "Historically, investors were willing to sacrifice quality for location and lease term in the quest for higher yield. However, more recently some investors feel more comfortable with the risk-reward of speculative credits in primary markets with strong real estate or store-level profitability." He cited recent examples of these more speculative investments including Tesla, Rite Aid drug stores, Applebee's restaurants and other franchisee-leased properties.

"While many net lease participants feel that we are in the late stages of the real estate cycle, there is no expectation of transaction volume slowdown for the remainder of 2019," Feeney said, noting historically, the fourth quarter sees the highest transaction volume as institutional investors seek to meet annual acquisition targets. "As a low interest rate environment is expected to remain for the near term, investors will continue to seek the stability and predictable cash flows that this investment class offers," he said.

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