NREI Readers Write

3rd Quarter 2012 National Net Lease Research Report

Cap rates for the single tenant net leased market remained near unprecedented levels across retail, office and industrial sectors in the third quarter of 2012. Cap rates for net leased office properties declined slightly and net leased industrial properties rose slightly, while cap rates for net leased retail properties remained unchanged. The primary factor contributing to the stagnation of cap rates for retail properties can be attributed to the plateau of investor yield thresholds as cap rates remain near historic lows. Additionally, the ten year treasury’s decline from the previous quarter halted in the third quarter of 2012 after reaching its lowest point of the year in mid-July. The recent increase in the ten year treasury had limited effect on cap rates due to the limited supply of newly constructed properties.

The net lease market continues to be limited by the constricted development pipeline and a limited existing supply of long term leased properties. The third quarter of 2012 experienced a 7.8% decrease in supply for all three property sectors. As a result of the decreased supply and continued demand, the increased competition amongst net leased investors in the third quarter of 2012 has triggered the national bid ask spread to compress by six basis points on average when compared to last quarter. Accordingly, the average marketing time for net lease properties has decreased by 20% over the past twelve months.

Investors are challenged to reach their yield thresholds with newly constructed properties due to near record low cap rates. Consequently, investor interest in properties with less than fifteen years of lease term has increased, most notably drugstore properties with strong sales performance. For example, the increased demand for Walgreens properties constructed from 2000-2004, which typically have higher yields, has caused cap rates for these properties to decline by 50 basis points in comparison to a year ago.

The national single tenant net lease market should remain active as the year end approaches and institutional investors seek to hit acquisition targets. Additionally, there will be an increased amount of sellers to take advantage of current capital gains rates as it remains uncertain how government policies will impact the net lease market in 2013. With cap rates near historic lows and new construction supply diminished, the majority of industry professionals believe the market will remain favorable to sellers for the remainder of the year. As the upcoming election looms, it is unclear as to what effect its outcome will have on the net lease industry in 2013.

Randy Blankstein is President of Net Lease Advisory firm The Boulder Group.

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