Cap rates in the single-tenant net lease retail, office and industrial sectors reached a new all-time low in Q3, according to The Boulder Group’s new Q3 Net Lease Research Report. When compared to Q2, cap rates compressed by 19, 10 and 11 basis points, respectively, for retail, office and industrial.
Courtesy of The Boulder Group
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“Cap rate compression in the third quarter of 2020 can be primarily attributed to the recent announcement by the Federal Reserve which suggested interest rates will remain near zero at least through 2023,” The Boulder Group President Randy Blankstein said. “Combining this with a recent ‘flight to quality,’ there has been significant cap rate compression for strong credit and essential net-leased assets.”
Boulder officials said they expect net lease transaction volume for 2020 will be significantly lower than 2019. Some of the decline can be attributed to the impact of the pandemic on vulnerable retail assets such as movie theaters, gyms and second-tier casual dining.
“Owners of less desired net lease assets are holding back from the market as they are uninterested in selling at unfavorable pricing,” Boulder partner Jimmy Goodman added. “Accordingly, the supply of net lease properties experienced a sharp decline of approximately 9% in Q3.”
As supply decreased, investors moved toward assets with high-quality tenants and long-term leases.
“The retail sector experienced its largest cap rate move since 2014 as private and 1031 exchange investors aggressively sought the lower priced assets this sector provided,” Boulder Senior Vice President John Feeney said. “With unprecedented cap rates across all three net lease sectors, sellers are aggressively pricing high-quality net lease properties to take advantage of the private capital chasing this product type.”
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