Cap rates in the first quarter of 2016 for the single tenant net lease retail sector remained unchanged at their historic low rate of 6.18%. During the same timeframe, cap rates for the office and industrial sectors increased to 7.25% and 7.26% respectively. While cap rates remained stable in the second quarter, an influx of net lease assets entered the market this quarter increasing the total supply by approximately 11%.
Cap rates for all major sectors remained unchanged or increased in the second quarter. While the strong demand from 1031 and private buyers kept retail cap rates firm, the volatility of the capital markets were a contributing factor to the cap rate increases for the office and industrial sectors. Historically, institutional capital is the traditional buyer for single tenant office and industrial assets; however, institutional investors are more sensitive to the volatility of the financing markets in 2016 and have adjusted cap rates accordingly. Throughout the course of the second quarter the 10 Year Treasury Yield ranged from as high as 1.94 and as low as 1.45.
Despite cap rate stability in the second quarter of 2016, the spread between asking and closed pricing increased for retail and office properties by 2 and 9 basis points respectively. Owners of net lease product have attempted to take advantage of the low cap rate environment over the course of 2016 with aggressive pricing. The widening of the spread between asking and closed cap rates illustrates the cap rate pushback from buyers on the aggressively priced assets. As a result, the marketing time for single tenant properties has lengthened by approximately 11% when compared to the prior quarter.
The net lease market is expected to remain active in 2016 investors continue to seek safe and stable returns. The majority of net lease participants expect cap rates to hold steady for the near term; however the perception is that there is upward pressure on cap rates. With the recent events in Europe and the subsequent drop in the 10 year treasury, it is expected that volatility will increase for the near term.
About the author: Randy Blankstein is President of net lease advisory firm The Boulder Group. http://bouldergroup.com/