NNNet Advisors Releases the Q4 2016 Single Tenant Net Lease Report

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The Calm Before the Storm? What to Expect with STNL in 2017.

Q4 Single Tenant Cap Rates came in lower than expected. Expectations of increased cap rates within the Net Lease sector have been shaped by a strengthening economy and an increase in interest rates.

The factor that is likely delaying an immediate jump in cap rates is the relative liquidity of STNL properties. While average days on the market for Q4 was 173 days, the average days on market for the most attractive assets continues to average closer to 85 days. Given these transaction times and subsequent delays in real time feedback, we expect that as long as interest rates remain in the same range or increase, there will be noticeable increases in cap rates in Q1 of 2017, likely beginning in late January.

A notable data point that will affect investors big and small in the immediate term is the current spread between median cap rates and the 10 year treasury. This measure is down sharply from 4.7% in Q3 to 3.7% at the end of Q4.

Moving into the new year, we expect that cautious buyers will begin to test the waters as the appeal of slightly higher cap rates will regain their interest. Institutional investors, which have wisely trimmed the fat in their portfolios over the past couple of years, will likely look to take a final look at selling assets that are not aligned with their long term goals while taking greater advantage of an increasing cap rate environment on the acquisitions side.

Properties with less than ten years remaining on their term traded near their all time lows at 6.8%. In this recent extremely low cap rate environment, investors have had to shift their focus to intrinsic value and unit level productivity in order to justify shorter term deals that lack credit and term.

Net lease assets remain in high demand as they represent a product type that held relatively strong through the great recession. Their passive nature coupled with relative simplicity have pushed this niche into a category of its own. 2017 transaction levels are expected to be comparable to that of the past couple of years, while as noted, cap rate levels are expected to increase slightly.

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Geoffrey Faulkner
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