Net Lease Cap Rates Reach New All-Time Low

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A Boulder Group report shows that cap rates for all three asset classes have reached historic levels

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"Cap rate compression in the third quarter of 2020 can be primarily attributed to the recent announcement by the Federal Reserve"

The Boulder Group announced the release of its 3rd Quarter Net Lease Research Report today. In the third quarter cap rates in the single tenant net lease retail, office and industrial sectors reached a new all-time low. When compared to the second quarter of 2020, cap rates compressed by 19, 10 and 11 basis points respectively for retail, office and industrial.

“Cap rate compression in the third quarter of 2020 can be primarily attributed to the recent announcement by the Federal Reserve which suggested interest rates will remain near zero at least through 2023” says Randy Blankstein, President, The Boulder Group. “Combining this with a recent “flight to quality”, there has been significant cap rate compression for strong credit and essential net leased assets.”

As Covid-19 continues to impact the real estate market, net lease investors are limiting the type of properties they are willing to acquire. Sellers of retail assets that experienced the greatest negative impact included movie theaters, gyms and second tier casual dining.

“Owners of less desired net lease assets are holding back from the market as they are uninterested in selling at unfavorable pricing,” adds Jimmy Goodman, Partner, The Boulder Group. “Accordingly, the supply of net lease properties experienced a sharp decline of approximately 9% in the third quarter.”

As supply decreased, an investor move toward assets with high quality tenants and long term leases continued in the net lease sector. Properties with long term leases to investment grade tenants are in the highest demand.

“The retail sector experienced its largest cap rate move since 2014 as private and 1031 exchange investors aggressively sought the lower priced assets this sector provided,” John Feeney, Senior Vice President, The Boulder Group adds. “With unprecedented cap rates across all three net lease sectors, sellers are aggressively pricing high-quality net lease properties to take advantage of the private capital chasing this product type.”

Net lease transaction volume for 2020 is expected to be significantly lower than 2019 as a result of Covid-19’s impact on the real estate sector.

“Investors will be carefully monitoring Covid-19, the economy and the upcoming election as each individual aspect could significantly alter the net lease landscape,” according to Blankstein. “Despite the normal hesitancy of buyers during an election year, the majority of net lease participants expect fourth quarter transaction volume to be the strongest quarter of the year.”

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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