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Net Lease Cap Rates Set Record

By Guest Author | January 8, 2016

Cap rates in the fourth quarter of 2015 for the single tenant net lease retail sector remained unchanged from the previous quarter at their historic low rate of 6.25%.

DG Plus Burlington, NC

Cap rates for the office and industrial sector reached new historic lows of 7.00% and 7.44%. Over the course of 2015, cap rates for retail, office, and industrial properties declined by 15, 35 and 26 basis points respectively as investor interest has increased due to the safe and stable returns this asset class generates.

Cap rates for all major sectors remained unchanged or declined in the fourth quarter. This can be attributed to the limited supply of product in a market with high demand despite a wide spread expectation of higher interest rates in the future. From the third quarter of 2015 to the fourth quarter of 2015, the overall supply of net lease assets decreased by more than 11%. Retail assets experienced the largest decline of 12.5%. Investor demand has continued for this asset class despite the decline in cap rates over the course of 2015. The increased demand in the net lease sector has caused cap rates to remain stable despite the volatility in the 10-year Treasury over the course of 2015.

The fourth quarter represented the first time in 2015 that the cap rate spread between asking and closed pricing increased for retail properties. Owners of net lease product have attempted to take advantage of the low cap rate environment over the course of 2015. The spread for retail and office properties expanded by 5 and 6 basis points for retail and office properties respectively illustrating the pushback from buyers on the aggressive pricing sellers are seeking.

The net lease market is expected to remain active in 2016 as investor demand for this asset class remains. The expectation is that there will be limited movement in valuations moving forward. In a recent national survey conducted by The Boulder Group, the majority of active net lease participants expect cap rates to remain unchanged or rise slightly in 2016. The largest segments of net lease participants expect cap rates to remain unchanged from 2015 levels by the end of 2016.

After the decision to increase rates at the December Federal Reserve meeting, investors will carefully monitor the capital markets and effect on pricing.

About the author: Randy Blankstein is President of net lease advisory firm The Boulder Group.

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