The Net-Lease Sector Appeal

By Randy Blankstein, President, The Boulder Group: Why does investor demand continue for this asset class?
Randy Blankenstein

Cap rates in the second quarter of 2015 for the single tenant net lease retail sector remained unchanged at their historic low rate of 6.40 percent. Cap rates for the office and industrial sector experienced slight downward movement of 5 and 8 basis points, respectively. Despite the 10- Year Treasury yield reaching its highest point of 2015 (2.47), investor demand has continued for this asset class. The increased demand in the net lease sector has caused cap rates to remain stable despite the increase in interest rates this quarter.

Owners of net-lease product have released an increased supply to the market in the second quarter of 2015 in attempt to take advantage of the low cap rate environment. Overall supply of net-lease assets was up over 21 percent in the second quarter, with retail assets leading all sectors at 23 percent. Even with an increased supply and compressed cap rate levels, bidding for net lease assets has been favorable to sellers. The median asking versus closed cap rate spread for all three sectors (retail, office and industrial) compressed slightly during this quarter.

As limited opportunities exist for new construction and long term leased properties to investment grade tenants when compared to the investor demand, these assets are commanding the highest prices. Recently constructed Dollar General, PNC Bank and O’Reilly Auto Parts properties experienced cap rate compression of 12, 30 and 12 basis points respectively in the second quarter. Furthermore, McDonald’s ground leased assets continued to achieve the lowest cap rate levels in the sector.

With investors carefully monitoring the capital markets for a potential rise in interest rates, pricing for institutional assets ($10 million and greater) will react first as these investors are more sensitive to interest rate fluctuations. Sellers will continue to seek aggressive pricing for their assets as the bidding environment remains competitive; however cap rates should remain near current levels in the near term.


Randy Blankstein is President of net lease advisory firm The Boulder Group.
http://bouldergroup.com/