Net Lease CAP Rates Close 2020 at Record Lows

January 13, 2021

For the second-consecutive quarter, single-tenant net lease cap rates have reached an all-time low, according to The Boulder Group’s Fourth Quarter 2020 Net Lease Research Report.

The results contradict industry expectations at the midyear point, when 80 percent of net lease participants in a survey conducted by the firm had anticipated that cap rates would rise by year-end.

“The amount of capital chasing yield in the net lease sector held cap rates at historic low levels despite the uncertainty that the pandemic has created in commercial real estate,” Randy Blankstein, president of The Boulder Group, told Commercial Property Executive.

The single-tenant net lease industrial sector experienced the largest compression—a full 13 basis points—dropping from 6.88 percent in the third quarter to 6.75 percent in the fourth quarter. Single-tenant retail cap rates compressed 6 basis points from 6.06 percent to 6 percent, while single-tenant office cap rates held steady quarter-over-quarter at 6.9 percent.

In addition to investors’ flight to quality, the historically low interest rate environment also helped maintain single-tenant net lease cap rates at record-low levels across the board in the fourth quarter. Notable transactions include the 201,700-square-foot, Amazon-occupied facility at 3405 S. McQueen Road, which sold for approximately $87.7 million at a cap rate of 4.56 percent, and the Kum & Go gas station/convenience store property at 1302 W. Victory Way in Craig, Colo., which traded for $1,500 per square foot, with a cap rate of 5.6 percent.

Ultimately, 2020 proved a relatively positive year for the single-tenant net lease sector. “Despite the issues the pandemic created for net lease investors early on, the property-level performance in the sector ended the year on a high note,” Blankstein said. “The most recent figures illustrate that many of the net lease REITs are now back to collecting rent in the mid-to-upper 90-percent range.”

While there is an element of uncertainty afoot in the net lease sector—including the timing of the full reopening of the economy and the possible threat to Section 1031 exchanges in the event of a Democrat-controlled Senate—The Boulder Group anticipates that cap rates will remain low, particularly for industrial properties. “Investor demand for industrial assets will continue to grow, which will likely continue cap rate compression for this sector,” noted Blankstein. “The pandemic has only amplified e-commerce’s growth in the retail sector leading to a greater need for industrial warehouses as quality industrial space is absorbed by the market.”

The forecast brightens even for those subsectors of the single-tenant net lease sector that have struggled amid the pandemic. “The expectation is that as the implementation of the vaccine continues to roll out, the net lease sector will continue to be a strong spot in the commercial real estate space. In the second half of 2021, even the soft spots of the retail environment—fitness and movie theaters—should start to see some sense of normalcy,” Blankstein added.

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