CAP Rates Reach Historic Lows

October 6, 2021

The Boulder Group’s Third Quarter Net Lease Research Report showed cap rates in the single tenant net lease sector reaching a historic low for all three asset classes in 2021.

Cap rates for retail, office and industrial fell to 5.80%, 6.80% and 6.70%, respectively.

“Significant investor demand combined with limited supply of quality net lease assets remains the primary driver of continued cap rate compression in the sector,” Randy Blankstein, President, The Boulder Group, said in prepared remarks. “Furthermore, during the third quarter, the yield in the 10-year U.S. Treasury decreased to its lowest levels since the first quarter of 2021.”

As pricing within the net lease sector remains at all-time highs; owners are taking advantage and adding properties to the market.

Property supply increased by approximately 9% in the third quarter, driven by an increase in retail and office properties. Property supply in the industrial sector decreased by more than 11% in the third quarter.

“The significant demand for industrial assets is causing many transactions to occur prior to a public marketing process,” added Jimmy Goodman, Partner, The Boulder Group. “This contributed to the decline in supply of net lease industrial product.”

In the third quarter of 2021, less than 25% of the retail property supply had more than 15 years of lease term remaining which is below the historical average. High-quality tenants with long term leases experienced the biggest decline in cap rates. Investment grade-rated tenants including 7-Eleven, AutoZone and Fresenius, experienced the greatest amount of cap rate compression for new construction properties.

Healthy Activity Over the Summer

Lanie Beck, Director of Corporate Research, Marketing & Communications, Stan Johnson Company, tells GlobeSt that its preliminary data for Q3 2021 indicates healthy investor activity over the summer for the single-tenant net lease market.

Projections put total investment volume for the sector between $14.8 and $16.5 billion for the quarter, which would fall just shy of the quarterly five-year average and look like a near repeat of Q1 2021.

Overall average cap rates for net lease assets are likely to compress by a few basis points as they approach the 6 percent-mark, putting the average at an all-time low.

“For pricing, the most notable trend we’re watching is within the net lease industrial sector, where cap rates have been in the high-5 percent range for six consecutive quarters now,” Beck said.

“Demand for newly built, high-quality distribution properties continues to be incredibly robust as both institutional and private buyers seek out these assets, and the cap rate compression we’re seeing is a direct result.

“But supply across all asset classes remains a challenge for investors. The appetite for net-lease investments is growing, and I have no doubt that we’d be seeing higher levels of investment volume if only the supply existed.”

Limited Supply of Long-Term Assets Created Competition

John Feeney, Senior Vice President, The Boulder Group added, in a release, “1031 exchange and private investors primarily seek assets with long-term leases and creditworthy tenants. The limited supply of long term leased assets created competition amongst all buyer profiles resulting in the cap rate compression experienced in the third quarter.”

Transaction activity in the net lease sector is expected to remain active throughout 2021 and continue through 2022, The Boulder Group reported.

“However, the demand for this asset class will be met by supply pipeline issues. The majority of new construction properties are concentrated in dollar stores and quick service restaurants,” according to its report.

For the past two quarters investors monitored potential tax changes related to the American Families Plan. In mid-September the House Ways and Means Committee released its tax proposal which did not include Section 1031 exchange elimination or modification.

“Market participants will continue to monitor the situation as any legislative changes could impact the overall net lease market,” Blankstein said.

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