Net Lease Cap Rates Expected to Rise by End of Year

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A Boulder Group poll shows 80% of net lease participants anticipate higher cap rates

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80% of net lease participants anticipate higher cap rates

The Boulder Group announced the release of its 2nd Quarter Net Lease Research Report today. In the first quarter national asking cap rates in the net lease retail sector increased by 10 basis points to 6.25% in the second quarter of 2020 when compared to the prior quarter. Cap rates for net lease office properties were unchanged at 7.00% while industrial properties compressed by 6 basis points to 6.99%.

“Throughout the second quarter, transaction velocity was negatively impacted by Covid-19 and the effects it had on business resulting from government mandated shutdowns” says Randy Blankstein, President, The Boulder Group.

Transaction volume in the first half of 2020 declined in excess of 20% when compared to 2019 in the net lease sector. In a recent national survey conducted by The Boulder Group, 80% of net lease participants expect cap rates to increase by the end of 2020; with 43% expecting an increase of up to 19 basis points. As investors become more conservative, properties with investment grade rated tenants and minimal impact from Covid-19 are more in favor within the net lease sector.

“In the second quarter of 2020 the net lease market was bifurcated between essential and non-essential businesses,” adds Jimmy Goodman, Partner, The Boulder Group. “Investor interest was largely focused on essential businesses that were open and operational including pharmacies, quick service restaurants, grocery, c-stores and dollar stores.”

Businesses labeled non-essential and largely shut down or significantly impacted include movie theaters, fitness centers, soft goods retailers and sit down dining. Investors backed away from non-essential businesses while waiting to see if the financial stress continues to effect tenants.

“There was a significant flight to quality by private investors who were looking to avoid the volatility of alternative investment vehicles and the stock market,” John Feeney, Senior Vice President, The Boulder Group adds. “Long term leases to credit tenants including 7-Eleven, CVS and McDonald’s represented some of the lowest cap rates in the sector in the second quarter.”

Competition amongst investors for high quality net lease product can be evidenced by the bid-ask spread in the second quarter of 2020. The spread between asking and closed cap rates compressed by 8 and 9 basis points respectively for retail and industrial sectors.

“Net lease transaction volume for 2020 is expected to be significantly lower than 2019 as a result of the impact of Covid-19,” according to Blankstein. “However, the stabilization of the 10 Year Treasury Yield in the second quarter will provide investors with an enticing yield spread for the net lease sector.”

To view the full report:

About The Boulder Group

The Boulder Group is a boutique, Chicago-based investment real estate services firm specializing in transaction and advisory services for single tenant net lease properties. Founded in 1997, the firm has closed over $6 billion of net lease property transactions. The firm provides a full range of brokerage, research, advisory, and financing services nationwide. The level of annual, single-tenant transaction volume consistently ranks the firm in the top 10 companies nationally, according to industry benchmarks determined by CoStar and Real Capital Analytics.

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