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Deals & Dealmakers

Cap Rates Reach New Records

The Boulder Group announced the release of its 1st Quarter Net Lease Research Report today. Cap rates in the single tenant net lease sector reached historic lows for all three asset classes in the first quarter of 2022. Single tenant cap rates compressed by 13, 10, and 17 basis points for the retail, office and industrial categories respectively. Cap rate compression continues to be derived from the significant demand for net lease properties across all investor classes.

“Following record transaction volume in 2021, net lease sales velocity continued in the first quarter of 2022” says Randy Blankstein, President, The Boulder Group. “Transaction volume in the first quarter of 2022 exceeded the first quarter of 2021 by more than 10% for the net lease sector.”

Despite the record transaction volume in 2021, the overall net lease property supply declined by more than 5% in the first quarter of 2022.

“Supply chain issues and delayed expansion plans for retailers related to Covid-19 limited new construction supply,” adds Jimmy Goodman, Partner, The Boulder Group. “Only 15% of net lease retail properties on the market were constructed in 2021 or 2022.”

New construction properties with credit tenants including AutoZone, CVS and Dollar General experienced greater compression. Cap rates for these tenants compressed by 20, 15 and 10 basis points respectively, in the first quarter. Competition amongst investors for high quality net lease product can be evidenced by the bid-ask spread in the first quarter of 2022. The spread between asking and closed cap rates compressed by 2, 5 and 7 basis points respectively for retail, office and industrial sectors.

“Towards the end of the first quarter, interest rates and inflation posed concerns to investors” John Feeney, Senior Vice President, The Boulder Group adds. “Accordingly, net lease investors are targeting properties with fixed rental escalations during the term of their leases.”

Transaction activity in the net lease sector will remain active through 2022. Property supply will be a constraint for transaction volume as current demand for net lease assets outpaces supply.

“Net lease investors will be carefully monitoring the capital markets following the uptick in the 10 Year Treasury towards the end of the quarter.” according to Blankstein. “Cap rates will face upward pressure as the Fed has forecast multiple rate hikes in 2022.”

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