Cap Rates for Net Leased Retail Properties Increase for First Time in Three Years, Says Boulder Group Report

by John Nelson

NORTHBROOK, ILL. — Cap rates in the fourth quarter of 2016 for the single-tenant net lease sector increased or remained the same for office, retail and industrial assets, according to The Boulder Group’s quarterly Net Lease Market Research Report. Retail cap rates experienced their first increase since the third quarter of 2013 to 6.19 percent. The nine-basis-point increase is the largest quarterly increase in retail cap rates since the second quarter of 2011.

Cap rates for the office sector remained unchanged at 7.08 percent, while the industrial sector increased by 3 basis points to 7.17 percent.

The Boulder Group attributes the increase in cap rates for the retail sector to the rise of treasury rates during the fourth quarter. During the fourth quarter, the 10-year Treasury yield increased significantly to 2.45 percent, up from 1.62 percent at the start of the quarter.

During the fourth quarter, the spread between asking and closed cap rates for retail properties increased by five basis points. This was the largest spread between asking and closed cap rates for retail properties since the fourth quarter of 2013.

Cap Rates Likely to Rise More in 2017

The net lease market is expected to remain active in 2017 as investor demand for this asset class remains high, according to the report. The expectation is that there will likely be upward movement in cap rates moving forward.

In a recent national survey conducted by The Boulder Group, the vast majority of active net lease participants expect cap rates to rise in 2017. The largest segment of net lease participants expect cap rates to increase between 25 and 49 basis points by the end of 2017. After the Federal Reserve’s decision to increase the federal funds rate at its December meeting, investors will carefully monitor the capital markets and their effect on pricing.

The Boulder Group is a boutique investment real estate service firm specializing in single-tenant net lease properties. Based in suburban Chicago, the firm provides a full range of brokerage, advisory and financing services nationwide to clients including high net worth individuals, developers, REITs, partnerships and institutional investment funds.

Founded in 1997, the firm has arranged the acquisition and disposition of over $4 billion of single-tenant net lease real estate transactions. Since 2011, the firm was ranked in the top 10 companies in the nation for single-tenant retail transactions by both Real Capital Analytics and CoStar.

— Staff Reports

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