Net Lease Column: The Top 3 Trends to Watch For in 2016

By Lanie Rea, Director of Research, Stan Johnson Co.: With 2016 around corner, these three trends will likely drive the net lease market.

Lanie Rea

The past year has been marked by growth as well as some hurdles. As 2015 comes to an end, net lease investors are continuing to watch closely for signs of market retraction or instability, bright spots in the economy that will translate to further growth, and creative investment opportunities to help increase market share in desired areas. As we look to 2016, we can expect to see several important trends that will drive the market.

1. Cap Rates

Average cap rates across all single-tenant property types have been compressing, and record-setting lows have been seen across the sector in recent quarters. With today’s supply-demand imbalance, a circumstance that generally drives this trend, there is no indication that cap rates have bottomed out. But when will we reach the bottom? This is the question on every investor’s mind as they evaluate the market to determine the ideal time to buy or sell. Given historical trends and the current appetite for quality assets, we expect 2016 will feature additional cap rate compression, albeit at a slower rate than what we’ve seen recently. Pending any significant influences, single-tenant retail cap rates could likely bottom out by mid-year 2016, with similar stabilization in the office and industrial sectors by year-end.

2. Buyer Distribution

In 2014, we began to see the distribution of buyer types shift in certain markets. This year, the trend has become more noticeable across the U.S. as private investors have gained market share from institutional investors. In a market dominated by aggressive pricing tactics, private investors tend to have more flexibility and are often able to out-bid other buyer types on certain transactions. Over the next 12 months, we expect to see this trend continue. Private buyers, especially those driven by 1031 exchanges, will continue to compete aggressively for high-quality assets. However, institutional investors will still need to place capital, so we can expect them to increase their focus on higher-priced assets, bulk portfolios and other creative investment opportunities.

3. Interest Rate, Election Year and the Economy

Between global economic uncertainty and looming interest rate hikes by the Fed, the U.S. net lease market has its fair share of external influences. The latest projections indicate interest rates could begin moving in December, which could affect everything from fourth-quarter investment sales volume totals to consumer spending this holiday season. The outlook for 2016 calls for continued domestic economic growth, which should translate into another year of robust investment activity. However, by mid-2016, the country will be focused on political campaigns due to the November election. Even without a change to the majority party, election years have historically affected the market. As a result, investors could potentially alter their mid- to long-term buying strategies. Advisors will need to continue to be attuned to the political landscape in order to provide the best service to their clients.