Net Lease Market Remains White Hot

Net Lease Market Remains White Hot

Cap rates for the single tenant net leased market remained near historic lows for retail, office and industrial sectors in the first quarter of 2013. Cap rates for net lease office and industrial properties declined while retail cap rates remained at 2012 fourth quarter levels.

Regardless of the decline in cap rates for office and industrial properties, net lease retail properties remain priced at a 45 and 77 basis point premium over office and industrial properties respectively. Properties occupied by credit tenants with long term leases experienced the greatest compression in the first quarter of 2013.

Limited supply of properties, specifically new construction, continues to be a major theme throughout the net lease industry. Overall property supply across the entire net lease sector decreased by more than 17 percent from the fourth quarter of 2012 to the first quarter of 2013. In the first quarter of 2013, the supply of net lease retail properties reached their lowest point in the past two years, while the supply of office and industrial properties reached their lowest point in the past three years.

Despite the scarce property supply in the first quarter of 2013, the median asking versus closed cap rate spread for net leased retail and office properties rose. This can be attributed to an increasing number of owners of properties with short term leases trying to capitalize on the high investor demand for single tenant properties with long term leases. There is a greater spread between the asking and closing price for short term leased properties as rollover risk and residual property valuation underwriting varies greatly per property.

The national single tenant net lease market should remain active throughout 2013 due to the stability and financing availability of this asset class. According to a national survey conducted by The Boulder Group, the majority of active net lease participants are expecting 2013 cap rates to remain unchanged or decline.

The largest portion of participants (37 percent) are expecting cap rates to decrease by less than 24 basis points by the end of 2013. As the majority of net lease participants expect cap rates to decline further in 2013, properties with long term leases will be more difficult to find as many current owners will hold given the attractive refinance rates available.

A shrinking supply and a limited development pipeline will make newly constructed assets in the highest demand and command the lowest cap rates.