THE NET LEASE MARKET REPORT NATIONAL ASKING CAP RATES
MARKET OVERVIEW
Q4 2017 (Previous)
Q1 2018 (Current)
Basis Point Change
Retail
6.07%
6.10%
+3
Office
7.00%
7.00%
0
Industrial
7.25%
7.29%
+4
Sector
NUMBER OF PROPERTIES ON THE MARKET Sector
Q4 2017 (Previous)
Q1 2018 (Current)
Percentage Change
Retail
3,822
3,710
-2.9%
Office
492
480
-2.4%
Industrial
452
430
-4.9%
MEDIAN NATIONAL ASKING VS CLOSED CAP RATE SPREAD Q4 2017 (Previous)
Q1 2018 (Current)
Basis Point Change
Retail
23
26
+3
Office
38
42
+4
Industrial
26
30
+4
Sector
2018
Q1
Cap rates in the first quarter of 2018 for the single tenant net lease sector remained relatively stable for the retail, office and industrial sectors. Cap rates increased for the retail and industrial sector by 3 and 4 basis points respectively. Cap rates for net lease office, remained unchanged. Net lease transaction volume in 2017 finished at $54 billion which was similar to 2016 according to CoStar. In a changing investment real estate environment, investors have made points of emphasis on trends, especially in retail. E-commerce resistant and experiential retail tenants including food, medtail, fitness, entertainment and convenience are in high demand amongst investors. Medtail is the term used for medical properties located in locations that were traditionally used for retail (shopping center outparcels, high traffic locations, etc.). The net lease sector remains bifurcated between the perceived high quality properties (new construction, long term leases, major markets, investment grade tenants, etc.) and lower quality properties. However, the supply of high quality product remains limited, especially in the higher dollar amount range (greater than $7 million). The majority of new construction supply in the net lease space remains concentrated with tenants in the dollar store, quick service restaurant and medtail sectors. However, net lease properties that exhibit positive real estate fundamentals including below market rents, strong store sale histories and positioning in strong retail corridors irrespective of remaining lease term remain a viable alternative for investors looking to achieve higher investment yields. The net lease market in 2018 is expected to be on pace with 2017 as investor demand for this asset class remains strong. As noted in a recent national survey conducted by The Boulder Group, the effect of interest rates on cap rate volatility will be the primary focus for net lease participants, as most net lease participants believe that cap rates will increase by the end of 2018. Investors will be carefully monitoring the monetary policy decisions of the Federal Reserve in 2018, as well as the capital markets and their effect on pricing.
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