THE NET LEASE MARKET REPORT Q3 2014 NATIONAL ASKING CAP RATES
MARKET OVERVIEW
Cap rates in the third quarter of 2014 for the single tenant net leased retail sector remained unchanged at their historic low rate of 6.50% from the second quarter. Cap rates for the office sector compressed by 37 basis points to 7.40% while cap rates in the industrial sector rose minimally by three basis points to 8.00%. There were no major contributing factors to the leveling of retail cap rates as supply and demand remained near levels from the previous quarter. During the third quarter, the Ten Year Treasury yield dropped to its lowest point of the year (2.55) in late August. However, by the end of the quarter, treasury rates rose and ended near levels similar to the end of the second quarter. With little movement in the capital markets, retail cap rates have plateaued as buyers cannot meet acceptable return thresholds at lower cap rates due to the low interest rate environment.
Sector
Q2 2014
Q3 2014
(Previous)
(Current)
Basis Point Change
Retail
6.50%
6.50%
0
Office
7.77%
7.40%
-37
Industrial
7.97%
8.00%
+3
NUMBER OF PROPERTIES ON MARKET
Sector
Q2 2014
Q3 2014
Percent
(Previous)
(Current)
Change
Retail
3,058
3,153
3.1%
Office
304
395
29.9%
Industrial
210
254
21.0%
Dollar store retailers, inversely to other retailers, have been expanding at an aggressive rate over the course of the past two years by adding over 2,000 locations during that time. However, with the most recent news regarding the potential Family Dollar acquisition, many investors have decided to wait and see how the situation plays out.
MEDIAN NATIONAL ASKING VS. CLOSED CAP RATE SPREAD
Sector
During the third quarter, the supply of office and industrial properties increased significantly by 30% and 21% respectively. Owners of these assets have attempted to take advantage of the current low retail cap rates by enticing investors with higher yields offered by office and industrial properties. The supply of retail properties increased by only 3.1% from the second quarter to the third quarter as new construction remains limited with the exception of the dollar store sector.
Q2 2014
Q3 2014
Basis Point
(Previous)
(Current)
Retail
18
22
Change +4
Office
51
31
-20
Industrial
35
62
+27
Demand throughout the net lease market will continue as investors remain attracted to the stable cash flows this asset class generates. While some investors wait on the sidelines as the changing dollar store sector takes shape, investor demand for other new construction properties in the $1-3 million dollar range (quick service restaurants, casual dining restaurants and auto part stores) will grow. With steady capital markets, market participant expectations are for cap rates to hold steady or rise slightly by the end of the year.
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