I have been getting a lot of questions from investors inquiring about single tenant net lease properties in regards to the properties location. In this issue of Net Lease Market Report I will discuss the current state of the net lease market and what individual investors are doing to get their hands on net lease assets.
Based on recent research and surveys it appears that investors are less concerned about the lease term then about the quality of the location. They feel if the tenant was ever to fail or go dark that they would have a better opportunity to re-lease the real estate because of the higher land value. Inventory is definitely an issue given the huge advantages and popularity of owning single tenant net lease assets. Investors still remain hungry and they remain in high demand even with the threat of increasing interest rates and potentially shorter remaining lease terms
In 3rd quarter, cap rates for single tenant retail and office deals increased for the first time in nearly 2 years. Retail asking cap rates increased two basis points to 7.02 percent while office cap rates rose 16 basis points to 7.7 percent, according to The Boulder Group. Industrial caps remained steady at 8 percent. The cap rate bumps was greatly attributed to the increase in interest rates
The supply of net leased retail and office properties decreased by more than 9 percent in the third quarter. New retail property volume coming to market fell 9.3 percent since mid-year, while new office property fell 10.1 percent, according to The Boulder Group. The market continues to be a sellers market with low cap rates but the demand still remains high even with the slight bump in nearly two years.
National Real Estate Investor reported that cap rates on net lease assets are beginning to now seeing a spread of almost 2 percent across the country’s various regions, with the West coast bottoming out and rates highest in the Midwest.
“That difference does drive some investors in more competitive markets to look elsewhere for opportunities with higher yields, but some observers say that effect can often be overstated,” wrote NREI’s Mike Janssen. “Regions’ cap rates are driven mainly by the major cities they contain, with lower overall rates for the West and Northeast.”
The market dynamics aren’t just region to region and not across the entire country. With the demand outpacing the supply in major metro areas, investors are forced to look into secondary and tertiary markets, as well as accept shorter remaining lease terms.
In conclusion, it appears that the low supply and high demand will continue to be a challenge for investors. Due to the limitations with lease terms and location along with cap rate compressions I anticipate that investors may have to change their investment strategy to shorter lease terms and expanded geographic areas especially if fulfilling 1031 exchange requirements and timelines
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