A Boulder Group report cites a high concentration of lower quality net lease assets as the primary factor

The Boulder Group announced the release of its 2nd Quarter Net Lease Research Report today. In the second quarter cap rates in the single tenant net lease sector rose slightly after hitting historic low levels in the previous quarter. Single tenant retail cap rates increased by 11 basis points to 6.02% while industrial increased by 18 basis points to 6.89%. Office cap rates remained unchanged.

“Following a quarter of historic pricing for the net lease sector, owners of lower quality assets brought properties to the market in attempt to take advantage of current cap rate levels” says Randy Blankstein, President, The Boulder Group. “The increased concentration of lower quality assets was the primary contributing factor for the rise in cap rates.”

Despite a decrease of approximately three percent in supply of net lease assets, lower quality assets (short term leases and less desirable tenant credits) made up a larger concentration of the market in the second quarter.

“The supply of assets with long term leases to credit tenants remains limited,” adds Jimmy Goodman, Partner, The Boulder Group. “Only 22% of the property supply had more than 15 years of lease term remaining.”

Demand for the perceived high-quality assets including McDonald’s, 7-Eleven and CVS heavily outweighs supply creating an extremely competitive market for these properties. Accordingly, cap rate compression for these assets exists in the current market. In the second quarter the bid-ask spread for net lease retail and industrial assets decreased by 2 and 4 basis points respectively.

“Significant competition for a limited amount of assets is causing some investors to seek alternatives in net lease,” John Feeney, Senior Vice President, The Boulder Group adds.  “In a search for yield, some net lease investors have shifted focus to categories that weren’t previously in as high of demand including daycares and tenants such as Rite Aid.”

The increased demand for net lease assets has provided a boost to liquidity for more speculative assets. Transaction activity in the net lease sector will remain active through 2021. The industry will pay careful attention to any potential tax code changes including the 1031 exchange proposed by the current administration and its potential impact on real estate and strategies moving forward. As the country continues to reopen, investors will carefully be monitoring assets classes that were not trading during the pandemic (fitness, theaters, etc.).

“The supply pipeline will determine if transaction volume will outpace 2020 or even the high-water mark of 2019,” according to Blankstein.

To view the full report: https://bouldergroup.com/media/pdf/2021-Q2-Net-Lease-Research-Report.pdf

About The Boulder Group

The Boulder Group is a boutique investment real estate service firm specializing in single tenant net lease properties. The firm provides a full range of brokerage, advisory, and financing services nationwide to a substantial and diversified client base, which includes high net worth individuals, developers, REITs, partnerships and institutional investment funds. Founded in 1997, the firm has arranged the acquisition and disposition of over $6 billion of single tenant net lease real estate transactions. From 2012-2020, the firm was ranked in the top 10 companies in the nation for single tenant retail transactions by both Real Capital Analytics and CoStar. The Boulder Group is headquartered in suburban Chicago.