Cap Rates Continue to Drop for Net Lease Properties
The dominant story line for credit tenant net lease assets the decline of cap rates in this space continues, according to the latest quarterly report by locally-based Calkain Cos., and New York City-based Chandan Economics.
Cap rates for retail net lease properties tracked by Chandan declined to a rolling average of 7.1% in June. Also, preliminary data for July and August show the compression continuing into the third quarter--even as spreads over the risk-free benchmark widened.
“This has been a consistent story for some time” Calkain principal Jonathan Hipp tells GlobeSt.com. “There is a direct imbalance between investor demand and supply, especially for well-located credit properties. Combine that with historically low interest rates and we get the current pricing and cap rate environment.” He adds that the industry is posting executions at the same level as 2007, “which a lot of people thought we would never see again.”
Bank branches and restaurant chain tenants are among the better performing assets, with the former seeing average cap rates fall to 6% in the second quarter. Most restaurant cap rates excluding such credits as McDonalds--fell to 8%. Other stable restaurant chains and some urban locations registered cap rates below 5%, rivaling high-quality assets in the office and apartment sectors.
Declining cap rates aren’t the only story line of note in this space. Other fundamentals include rising prices and an enthusiasm for some sellers to exit the market. Some owners are finding that the strong valuations, the availability of low-cost financing for prospective buyers and the possibility of higher capital gains tax rates too enticing to resist.
Hipp estimates that one-third, if not more, of his clients want to close deals this year to take advantage of capital gains. “For that reason we think the fourth quarter will be a buoyant one for sales.”
The report was authored by Hipp and Sam Chandan, principal of Chandan Economics. The two firms partnered this year to begin releasing quarterly reports on this under-reported space.
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