Cap Rates Remain at Historic Lows for Net Lease Retail Sector, Says Boulder Group

by John Nelson

NORTHBROOK, ILL. — Cap rates in the fourth quarter of 2015 for the national single-tenant net lease retail sector remained unchanged from the previous quarter at their historic low rate of 6.25 percent. According to The Boulder Group, a Northbrook-based boutique investment real estate firm, cap rates for the office and industrial sector reached new historic lows of 7 percent and 7.4 percent, respectively.

During 2015, cap rates for retail, office and industrial properties declined by 15, 35 and 26 basis points respectively as investor interest has increased due to the safe and stable returns this asset class generates, according to the report.

Cap rates for all major sectors remained unchanged or declined in the fourth quarter. This can be attributed to the limited supply of product in a market with high demand despite a wide spread expectation of higher interest rates in the future.

From the third quarter of 2015 to the fourth quarter of 2015, the overall supply of net lease assets decreased by more than 11 percent. Retail assets experienced the largest decline of 12.5 percent. Investor demand has continued for this asset class despite the decline in cap rates over the course of 2015. The increased demand in the net lease sector has caused cap rates to remain stable despite the volatility in the 10-year Treasury over the course of 2015.

The fourth quarter represented the first time in 2015 that the cap rate spread between asking and closed pricing increased for retail properties. Owners of net lease product have attempted to take advantage of the low cap rate environment over the course of 2015. The spread for retail and office properties expanded by 5 and 6 basis points for retail and office properties, respectively, illustrating the pushback from buyers on the aggressive pricing sellers are seeking.

The net lease market is expected to remain active in 2016 as investor demand for this asset class remains. The expectation is that there will be limited movement in valuations moving forward.

In a recent national survey conducted by The Boulder Group, the majority of active net lease participants expect cap rates to remain unchanged or rise slightly in 2016. The largest segments of net lease participants expect cap rates to remain unchanged from 2015 levels by the end of 2016. The online poll was sent to Boulder’s clients nationwide.

Founded in 1997, The Boulder Group has arranged the acquisition and disposition of more than $3 billion of single-tenant net lease real estate transactions. In 2010-2015, the firm was ranked in the top 10 companies in the nation for single-tenant retail transactions by Real Capital Analytics. The company publishes quarterly research reports for the net lease retail and medical sectors, as well as reports on single-tenant drug stores, banks, quick-service restaurants and dollar stores.

— John Nelson

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