THE NET LEASE MARKET REPORT Q4 2014 NATIONAL ASKING CAP RATES
MARKET OVERVIEW
Q3 2014 (Previous)
Q4 2014 (Current)
Basis Point Change
Retail
6.50%
6.50%
0
Office
7.40%
7.31%
-9
Industrial
8.00%
8.03%
+3
Sector
NUMBER OF PROPERTIES ON THE MARKET Sector
Q3 2014 (Previous)
Q4 2014 (Current)
Percentage Change
Retail
3,153
2,964
-6.0%
Office
395
300
-24.1%
Industrial
254
292
+15.0%
MEDIAN NATIONAL ASKING VS CLOSED CAP RATE SPREAD
Q3 2014 (Previous)
Q4 2014 (Current)
Basis Point Change
Retail
22
21
-1
Office
31
29
-2
Industrial
62
45
-17
Sector
Cap rates in the fourth quarter of 2014 for the single tenant net leased retail sector remained unchanged at their historic low cap rate of 6.50% for the third consecutive quarter. Additionally, cap rates for the net lease office sector compressed by nine basis points to a new historic low cap rate of 7.31%. Net lease industrial cap rates rose slightly to 8.03% during this period. Limited movement in interest rates and a restricted development pipeline are contributing factors to the stagnant cap rates in the retail sector. Stable capital markets have caused investors to hold firm at pricing for retail assets in order to achieve desired returns. However, long term leases in core markets continue to demand an additional premium. In 2014, a notable change occurred in the buyer type for the retail net lease market. In 2014, private investors accounted for 60% of net lease retail transactions, a significant increase when compared to 42% in 2013. Private buyers continue to dominate the net lease market in the low cap rate environment as institutions cannot typically pay the cap rate premiums due to yield restrictions. The majority of investors acquiring low cap rate properties, including 1031 exchange investors, are seeking new construction assets with investment grade tenants. For example newly constructed Walgreens, McDonald’s ground leases and 7-Eleven properties experienced cap rate compression of 5, 25 and 13 basis points respectively in the fourth quarter. The net lease market is expected to remain active in 2015 as investor demand for this asset class continues, however the expectation is that there will be limited movement in valuations moving forward. In a recent national survey conducted by The Boulder Group, the majority of active net lease participants expect cap rates to remain unchanged or rise in 2015. The largest segment of net lease participants expect cap rates to rise slightly from 2014 levels by the end of 2015.
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