MARKET OVERVIEW
Cap rates for the single tenant net leased retail and office markets
reached their lowest levels in the past decade in the fourth quarter of
2013. However, cap rates for the net leased industrial market increased
during the same period. The fourth quarter of 2013 represented the first
time in the past decade that cap rates for the net leased retail market
were below 7.00%. Net leased office properties experienced the largest
cap rate decline of 30 basis points in the fourth quarter.
Although interest rates in the fourth quarter remained above early
2013 levels, cap rates have not increased. Investors’ perception was
that cap rates would follow the rising interest rate climate; however this
correlation did not occur. In the fourth quarter of 2013, cap rates for
retail and office properties achieved ten year lows of 6.85% and 7.40%
respectively. Supply constraints remain a primary factor to the current
cap rate levels within the net lease market. As many institutions and
real estate funds have year-end acquisition targets, the third and fourth
quarters typically experience higher transaction volume when compared
to the first and second quarter. The increased amount of transactions
further contributed to the decrease in supply. Additionally, investors were
able to refinance at historically low rates which allowed single tenant
property owners to hold rather than sell.
Net leased retail properties continue to be at the forefront of investor
demand as evidenced by their premium over the entire net lease market.
For example, retail property cap rates were a 55 and 130 basis point
premium over office and industrial properties respectively. The spread
between closed and asking cap rates for retail properties increased
12 basis points in the fourth quarter of 2013 when compared to the
previous quarter. This was the first time since the first quarter of 2013
that the spread had not declined.
The national single tenant net lease market should remain active in 2014
due to investors’ search for yield combined with a greater institutional
acceptance of the net lease sector. In a recent national survey conducted
by The Boulder Group, the majority of active net lease participants expect
cap rates to rise in 2014. The largest segment of net lease participants
expect cap rates to rise more than 25 basis points by the end of 2014.
The most cited reason by participants was the expectation that interest
rates will increase.
(Source: The Boulder Group)