NNNet Advisors Releases the Q2 2016 Single Tenant Net Lease Report

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Q2 Cap Rates Remain Near Historic Lows

Cap rates in Q2 remained near their all time lows, moving up 5 basis points from last quarter’s record setting levels.

Sellers continue to take advantage of the current market conditions and will likely do so for the near future as BREXIT and other perceived market turmoil continue to promote future uncertainty. As we near our five year anniversary, both as a company and as it relates to the data that we track, cap rates have essentially remained in a continuous free-fall. While the cap rate plunge continues to produce profits for long term property owners, many buyers are looking forward to an upswing in cap rates. When cap rates begin to increase, interest rates will likely be moving in the same direction. Higher interest rates are not ideal, but a chance to make acquisitions at cap rates that are historically sustainable will be welcomed by many.

We have read multiple reports that net lease transactions were down significantly in the first half of the year. What we have found is that while this may be true on the institutional sized transactions of $10M+, the private sized deals that come in well under that range have been trading at a similar volume to that of one year ago.            

Most subsectors of the net lease market remained relatively flat from the prior quarter. The one exception was Discount Stores, which moved up approximately 50 basis points to 7.4%. This could be a sign that some investors are waking up to fact that most of the new build Dollar General and Family Dollar properties are located in tertiary locations and feature relatively flat rents. Investors generally settle for good credit at the expense of location on these deals. At the end of the base term, how much does the tenants credit really matter if you are forced to re-tenant a building in a sparsely populated area? Auto related properties including Advance Auto, Auto Zone, and O’Reilly’s continue to stay red hot, decreasing approximately 90 basis points in 1 years time.

Moving forward into Q3, we expect more of the same. While interest rates could rise slightly, the likelihood that they would rise enough to impact the net lease market is very unlikely.

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Geoffrey Faulkner
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