Net Lease Cap Rate News
Net Lease Cap Rate Economic Report
RESTON, VA-Earlier this year, locally-based CalkainCos., and New York-based Chandan Economics announced a new mission: they would
partner to provide research in one of the few areas of commercial real estate.
Hipp: "Given where Treasuries are headed,
people are looking for yield."
That day is here. The two firms are getting set to
release their first report and have given GlobeSt.com an exclusive sneak
preview. The report covers trends in the
macro economy with an eye on how these impact the net lease space.
It has found that the fit-and-start nature of the
recovery has reinforced the appeal of net lease assets especially those with
long term, high quality tenants. In addition, the sector is grappling by a lack
of supply. The result of these multiple trends, not surprisingly, is that cap
rates are low and getting lower. Namely, net lease cap rates declined by five
basis points to just over 7.2% in the first quarter on average.
These rates, of course, fluctuate based on geography
and tenant type. California and the Northeast, for example, claim the lowest
cap rates.
The report also notes there is stronger investor
demand for bank branches, pharmacies, and the best-performing fast food chains.
Bank branches registered average cap rates of 6.1% in Q1, for example--100
basis points lower than the 7.1% average cap rate for pharmacies.
Investors, however, can be counted on to show a high
degree of sophistication in their acquisitions not only across classes of
tenants but specific tenants, as well. Sam Chandan, president and chief economist
of Chandan Economics, tells GlobeSt.com. “Some pharmacy and bank branches are
trading at sharply lower cap rates than their peers, even after controlling for
variation in property quality and time to lease maturity.” For these most
coveted assets, he says, debt yields are lower, as well, meaning that lenders
perceive many of the same differences as relates to credit risk.
The most aggressive cap rates Jonathan Hipp, CEO ofCalkain, says he has seen has been in the mid 4s for “McDonald’s-type credit.” Expect compression to continue, he tells
GlobeSt.com. “Given where Treasuries are headed, people are looking for yield.
Also, there is so much buyer interest in this product now we have gotten to the
point where we almost don’t need new buyers. What we would like to have is more
products.”
Not that the demand-supply imbalance will give
investors pause, Hipp adds. “With everything going on, from the uncertain
employment picture to the European debt crisis, at end of day people are still
cautious on the economy. With the right combination of credit, location and
length of lease it is a great time to be a seller in the net lease market.”
Or even a buyer, he says—but with a caveat. In this
environment, current buyers should beware that an eventual exit strategy could
happen in a period of higher interest rates and a diminishing flight to
quality.
