National asking cap rates in the single-tenant net lease sector increased in all three property types during the first quarter, moving higher than the historic lows that had been achieved at the end of 2019, the Boulder Group says in its latest report on the sector.
Cap rates ended Q1 at 6.15% for retail properties, 7.00% for office properties, and 7.05% for industrial properties, increases of eight, six and 15 basis points, respectively.
“Key barometers and metrics that typically tell an accurate story about the national net lease market are somewhat inconclusive because of the ongoing evolution of the COVID-19 situation, along with the inherent volatility and uncertainty the situation is creating,” said Randy Blankstein, president, The Boulder Group.
According to the report, regardless of current cap rate levels, net lease transaction volume in 2019 totaled more than $80 billion, up 35% from 2018. However, Blankstein predicts that 2020 transaction volume is likely to fall significantly as a result of COVID-19.
“Following a robust 2019, net lease transaction momentum continued into the first two months of 2020,” added Boulder Group partner Jimmy Goodman. “However, late in the first quarter, overall net lease activity was reduced and the supply of net lease properties declined.”
The fallout from the COVID-19 pandemic started in mid-March, and resulted in many institutional investors canceling transactions or placing pauses on acquisitions during this time of instability and market volatility. By the end of Q1, the primary interest from net lease investors was from private investors and 1031 exchange buyers.
In looking ahead, at least for the next month, Blankstein sees 1031 investors continuing to seek stable cash flows from this asset class while sheltering their capital gain.
“Properties targeted by these investors are from the essential businesses that are less impacted by Covid-19: pharmacies, convenience stores, dollar stores and grocery stores with investment grade rated tenants,” Blankstein notes.
The report anticipates that we’ll see limited investor interest in properties that fall in the non-essential category until there is further stability. “The market’s bifurcation between essential and non-essential businesses during the Covid-19 pandemic is very telling,” Goodman said.
“Investors want and rely on dependable cash flows,” he added. “Tenants’ balance sheets will be an important consideration moving forward.”
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