Single-Tenant Net-Lease Market Firing On All Cylinders As Cap Rates Hit Historic Lows

Competition among investors for single-tenant net-lease properties intensified last year, sending cap rates down to historic lows nationwide, and the widespread eagerness to buy in this market may not slow down in 2020, according to a Q4 net-lease report by Wilmette, Illinois-based The Boulder Group.

“There is a tremendous amount of equity out chasing net-lease assets,” The Boulder Group partner Jimmy Goodman said.   

The final numbers aren’t in, but he said when 2019 sales activity across all single-tenant net-leased properties nationwide have been tabulated, sales volume will likely surpass — by a significant margin — 2018’s $59B total.

Asking cap rates in Q4 fell 14, 6 and 5 basis points nationwide to 6.07%, 6.94% and 6.9% for retail, office and industrial properties, respectively, Boulder’s survey found. Goodman attributes some of that decline to a steady demand for such investment opportunities, especially for retail, even though the number of single-tenant retail properties on the market in Q4 fell to about 3,900, a decline of about 10% since Q3.

The enthusiasm for retail buildings, even in an age when news coverage of the sector tends to be gloomy, doesn’t surprise Goodman. Such properties, which usually sell for between $1M and $10M, far less than the typical office and industrial deals, hit the price points needed by the smaller 1031 investors that dominate the market.

“There is a lot of noise about the retail sector, but most of the retail businesses going under are not typically part of the net-lease market, which is dominated by stores like Walgreens, CVS [and] 7-Eleven, and they are not going anywhere,” he said.

“Retail is also very easy to understand for these investors, with brand names they have been shopping at themselves, and there is no responsibility in terms of management, making it very hands-off from their perspective.”

That should fuel the 2020 market, Goodman said. Still, investors surveyed by Boulder are not so sure. Worries about the upcoming election, the possibility of other political turmoil and the durability of the current real estate cycle have some sounding cautious notes.  

About 46% said cap rates will increase this year, and 13% of those surveyed said rates will go up by 25 basis points or more. Another 54% said rates will either decline or stay about the same.   

That level of uncertainty means investors will carefully monitor the market, looking for any hints of economic disruption, and focus even more attention on the safest properties, ones newly constructed and backed by corporate guarantees, as well as those with the longest remaining lease terms.

But as long as the overall economy stays robust, with solid job creation numbers, and receives no shocks from abroad, Goodman remains quite optimistic.

“We don’t see anything slowing this market down. We’re only a few weeks into it, but we are having one of the busiest first quarters we’ve ever had.”