NNNet Advisors Release the Q3 2016 Single Tenant Net Lease Report

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Q3 Cap Rate Data Is Almost Identical to Q2 as Cap Rates Hover at Low Levels

The modest increase in cap rates from Q1’s all time lows have held steady over the past two quarters. Buyers continue to take advantage of historically low interest rates while sellers cash in during this continued low cap rate environment with the hopes of rebalancing their portfolios.

Expect to see more of the same as we move into the final quarter of the year. While an increase in interest rates is eminent, the economy is still showing signs that it is not able to withstand anything drastic in the short run. Low interest rates continue to motivate investors to remain bullish on net lease opportunities, as there is still a spread to be achieved between current interest rates and cap rates, especially when utilizing shorter term debt.

Many institutional investors remain net sellers in 2016 as they continue to take advantage of a shortage of quality product on the market. Expect the acquisition activities of sophisticated investors to increase when cap rates begin to migrate back towards historical norms in the next 1-3 years. Until then, investors with tax motivations and a game plan of playing not to lose will compete with one another for top quality product and record low cap rates will continue to be set on trophy properties.

Cap Rates for Discount Stores have already begun to migrate back towards historical norms as the market has been flooded with new offerings. New builds in secondary locations have begun to move from the low 6’s to the mid to high 6’s in cap rate. Offerings with less than 10 years remaining are trading mostly in the high 7 range, while short term offerings of 5 years or less range from the 8 cap range to near illiquidity, unless compensating factors exist, such as strong unit level sales data.

Spreads between Cap Rates and Treasuries held steady in the 4.8% range. This spread remains the silver lining in this low cap rate environment. Cap rates for properties with more than 10 years remaining dipped below 6% for only the second time since 2011.

Bank Cap Rates continue to rise steadily from their historic lows one year ago. Expect more of the same as Banks continue to reduce their brick and mortar overhead in an attempt to remain competitive.

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Geoffrey Faulkner
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