Net Lease Investments Rate Continue to Dip
The
dominant story line for credit tenant net lease assets—the decline of cap rates
in this space—continues, according to the latest quarterly report by
locally-based Calkain Cos., and New York City-based Chandan Economics. Cap rates for retail net lease properties tracked by Chandan declined to a rolling
average of 7.1% in June. Also, preliminary data for July and August show the
compression continuing into the third quarter--even as spreads over the
risk-free benchmark widened.
“This
has been a consistent story for some time” Calkain principal Jonathan Hipp
tells GlobeSt.com. “There is a direct imbalance between investor demand and
supply, especially for well-located credit properties. Combine that with
historically low interest rates and we get the current pricing and cap rate
environment.” He adds that the industry is posting executions at the same level
as 2007, “which a lot of people thought we would never see again.”
Bank
branches and restaurant chain tenants are among the better performing assets,
with the former seeing average cap rates fall to 6% in the second quarter. Most
restaurant cap rates excluding such credits as McDonalds--fell to 8%. Other
stable restaurant chains and some urban locations registered cap rates below
5%, rivaling high-quality assets in the office and apartment sectors.
Declining
cap rates aren't the only story line of note in this space. Other fundamentals
include rising prices and an enthusiasm for some sellers to exit the market.
Some owners are finding that the strong valuations, the availability of
low-cost financing for prospective buyers and the possibility of higher capital
gains tax rates too enticing to resist.
Hipp
estimates that one-third, if not more, of his clients want to close deals this
year to take advantage of capital gains. “For that reason we think the fourth
quarter will be a buoyant one for sales.”
The
report was authored by Hipp and Sam Chandan, principal of Chandan Economics.
The two firms partnered this year to begin releasing quarterly reports on this
under-reported space.
