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Net-Lease Investors Expect Cap Rate Increases Going into 2018

Net-lease real estate investors expect cap rates in their sectors to increase “in the coming year,” says a new report by national net-lease commercial real estate firm The Boulder Group.

Halfway through 2017, and cap rates for the net-lease sector are up across the board.

The biggest increase came in the industrial sector, with second-quarter 2017 cap rates up 10 basis points quarter-over-quarter (q-o-q) to 7.37%, according to the Q2 2017 Net Lease Research Report just published by firm.

The market has swung back to neutral, says The Boulder Group. The change follows years of a market perceived to favor sellers. Anticipation of higher interest rates this year has caused some pricing pushback this year, the firm notes. Closing spreads between asking and closing cap rates have widened across all net-lease assets, growing 5 basis points for office deals and 6 basis points each on retail and industrial transactions.

Retail net-lease cap rates saw a 4 basis point bump q-o-q, hitting 6.23% in the second quarter. Troubles for retail in the form of store closings have not touched net-lease assets, and investors have taken notice. 1031 and private investors are expected to continue to flock to net-lease retail through 2017.

Pharmacy transactions should see an activity uptick this year associated with Walgreens’ agreement to acquire 2,186 Rite Aid stores, The Boulder Group says, calling it “a key event” for the net-lease real estate market.

“Following a year of gridlock associated with the merger, pharmacy-transaction volume should experience a surge as the uncertainty surrounding this transaction has ended,” write The Boulder Group researchers.

Activity seems to be picking up already. Commercial real estate services firm Marcus & Millichap just exclusively listed a 17-property net-lease retail portfolio for approximately $77.4 million. The properties are situated in Ohio, New York and Pennsylvania. The portfolio comprises 14 Rite Aids, two Family Dollars and one CVS.

Courtesy: Marcus & Millichap

The portfolio provides a great opportunity for investment in Midwest and Northeastern U.S. net lease markets, explains Ronnie Issenberg, a vice president of investments at Marcus & Millichap. “All properties are located in markets where the average household income is at or above $50,000 and most locations face no direct competition from a proximate Walgreens. Additionally, 12 of the assets are ideally positioned on signalized corners,” Issenberg notes.

Cap rates on office net-lease assets inched up 2 basis points q-o-q to 7.14% in the second quarter. Included amongst those are medical care properties, another active niche for net-lease investors this year, says The Boulder Group.

Supply of both industrial and retail net lease real estate increased in the second quarter. As of the second quarter there are 3,968 retail net-lease properties on the market, a 4.7% increase over the last quarter. The supply of industrial net lease assets rose 2.5% to 368 properties in the second quarter, compared to 359 properties in first-quarter 2017.

But the number of available net-lease office assets has retreated. There are 357 sitting on the market as of the second quarter, according to The Boulder Group, compared to 395 in the first quarter. That’s a 9% drop.

Diana Bell: