Growing Demand, Supply Constraints Keep Lid on Net-Lease Cap Rates: Boulder Group

The market for single-tenant assets should remain stable through the end of the year as demand for core assets keeps the lid on cap rates.

October 19, 2011
By Paul Rosta, Senior Editor

Demand for commercial real estate assets in the face of economic volatility helped compress cap rates for net-lease properties in the third quarter, according to a national survey by the Boulder Group. The market  for single-tenant assets should remain stable through the end of the year as demand for core assets keeps the lid on cap rates.

Released on Tuesday, the analysis by Northbrook, Ill.-based Boulder cited the decline in retail cap rates as the best illustration of the trend. During the third quarter, the bid-ask spread for retail property cap rates declined 20 basis points to 46 basis points. Overall, retail continues to offer the lowest cap rates among the three net-lease property types. Reckoned by asking prices nationwide, the average cap rate for retail properties dropped 25 basis points to end the third quarter at 7.75 percent.

As for the two other major categories of net-lease assets, cap rates for office properties dipped 15 basis points to 8.24 percent, and industrial assets declined 23 basis points to 8.47 percent.

Cap rates declined for generally for restaurants, banks, net-leased federal government properties and leaseholds; ground leases, zero cash-properties, CVS drugstores, and Dollar Brand outlets all registered upticks. Among national retail brands, rates dropped for Walgreens (5 basis points), FedEx (54 basis points) and McDonalds (40 basis points). “Historically low interest rates and a lack of quality single tenant properties were secondary contributing factors to the compression of cap rates that occurred in the third quarter of 2011,” the report said.  Supply of net-leased properties is under pressure from two directions. A development slowdown continues to reduce the volume of new product available to buyers. Retail properties on the market ticked up from 2,256 to 2,360.

A total of 540 office properties were on the market by the end of September, 103 more than during the third quarter and a 19% increase. The industrial sector added 30 new properties during the quarter, bringing the total available to 300 nationwide. Meanwhile, fewer sale-leaseback deals are coming to market because corporations needing to raise capital can turn to cash on hand and low-cost debt.

As for pricing, one-third of the net-lease assets on the market were offered for $1 million or less. The single largest category—39 percent—included properties priced between $1 million and $3 million. Higher-priced assets make up a considerably smaller proportion of what’s available. Eighteen percent of net-lease offerings carry price tags between $3 million and $6 million, and only 11 percent are priced at $6 million or more.