High-Action Quarter for Net Lease Market

2013 proved a busy year in the single-tenant net lease market, and the fourth quarter was no exception. As noted in The Boulder Group's national net lease market report, the last three months of 2013 were anything but boring.
Randy Blankstein, The Boulder Group

Randy Blankstein, The Boulder Group

2013 proved a busy year in the single-tenant net lease market, and the fourth quarter was no exception. As noted in The Boulder Group’s national net lease market report, the last three months of 2013 were anything but boring.

The numbers tell the story, and it is quite a story. In the net lease retail and office markets, cap rates declined to their lowest levels in the last decade, with respective basis points drops of 17 and 30 resulting in cap rates of 6.85 and 7.40 percent. And much to the surprise of many an investor, not even the rise in interest rates caused an increase. Boulder attributes the decline in cap rates to constrained supply that was all the more limited due to traditional year-end buying, as well as the low interest rates which provided single-tenant property owners greater opportunity to stave off selling by refinancing.

However, in the net leased industrial market, it was quite a different tale. Cap rates went on the rise, increasing 15 basis points to 8.15 percent in the final quarter of the year. In this respect, the industrial net lease market may very well be a harbinger of things to come for the retail and office markets in 2014. What goes up must come down, and the reverse is also true.

“Almost everyone believes cap rates will be rising this year,” Randy Blankstein, president, The Boulder Group, told Commercial Property Executive. “That’s clearly the trend and a widely held belief in the marketplace.” A notable 60 percent of respondents to a Boulder poll indicated their belief that cap rates would move upward in 2014; 39 percent anticipates increases of 25 basis points or more.

But some things are expected to remain the same in 2014. “I think the biggest surprise of 2013 was the volume of mergers and acquisition activity, the robust pace of it, and I don’t believe we’re done yet,” Blankstein added.

Certainly American Realty Capital Properties Inc. did its part with the $3.1 billion merger with American Realty Capital Trust IV and its $11.2 billion acquisition of Cole Real estate Investments Inc.  And then there were deals such as Realty Income Corp.’s agreement to purchase an 84-property single-tenant net-leased retail and industrial portfolio from Inland Diversified Real Estate Trust Inc. for $503 million. The deals just kept on rolling in 2013.

“I think that we’ll see a continuation of that in 2014, as the market reacted very well to the acquisitions that took place so I would expect that we’re not done in that regard,”  Blankstein concluded.