GlobeSt.com -- Equity continues to enter the commercial real estate
sector and push down cap rates for net lease properties, according to a
new report from the Boulder Group, a commercial real
estate firm located in suburban Chicago. After hovering steady at 6.5%
for several quarters, cap rates in the first quarter of 2015 for the
single tenant net lease retail sector reached a new historic low of
6.4%. Furthermore, a renewed faith in the nation’s industrial sector
resulted in a precipitous drop from 8.03% to 7.7% for industrial
properties. Office cap rates rose slightly to 7.35%. Retail assets have long commanded the lowest cap rates
due to demand from private and 1031 investors who “prefer retail over
office and industrial due to their familiarity with the tenants,” Randy Blankstein,
president of Boulder, tells GlobeSt.com. "The brand name is what
attracts investors initially and then they move on to the other
criteria." Retail properties typically have long leases, lower prices
and triple net lease structures that allow these owners to remain
largely passive.
The 33 bps decline among industrial assets may not be surprising considering how much the outlook has improved for the industrial economy. “Strengthening fundamentals throughout North America support a positive forecast for the next three years,” Maria Sicola, head of research for the Americas group at Cushman & Wakefield,
recently said. “Trends in supply and demand are favorable across all
major and secondary markets, with an overall decline in vacancy,” added John Morris, C&W’s leader, industrial services for the Americas. The firm recently pegged the vacancy rate at just 6.7%.
Still, investors will continue to show the most interest in retail
properties, Blankstein says. And 1031 investors will continue to
dominate the net lease market because they can pay more than
institutions due to tax benefits received and an ability to accept lower
returns. "In today's market most institutions are unable to get the
yield they need under a 6.25% cap rate."Most investors are looking for newly-constructed assets with investment-grade tenants, and those types of properties are in short supply, and generate a great deal of competition when they hit the market. For example, Boulder found that newly-constructed Walgreens, McDonald’s and 7-Eleven properties saw cap rate declines of 5, 25 and 13 bps respectively in the fourth quarter. As limited opportunities exist for long term leased properties to investment grade tenants when compared to the investor demand, these assets are commanding the highest prices. Recently constructed Walgreens, CVS and Family Dollar properties experienced cap rate compression of 25, 12 and 25 basis points respectively in the first quarter. The net lease market should remain robust for the rest of the year. However, Boulder also expects that investors will carefully watch out for a boost in interest rates and subsequent softening in asset pricing. “Sellers will continue to aggressively price assets in attempt to achieve favorable cap rates in sale transactions; however the expectation is that cap rates should remain relatively stable in the upcoming quarters.”
