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Net Lease Cap Rates Continue on Upward Trend
In contrast to office and industrial, net lease cap rates in the retail sector widened in the second quarter, according to the Boulder Group. Average cap rates for retail properties ticked upward by 10 basis points to 6.2%, compared to a decline of 25 bps for industrial during the same time period.
That being said, cap rates for net lease retail still are the lowest among the three sectors, and have been remarkably consistent over the past three years.
The Boulder Group predicted that cap rates should continue trending upward as the Federal Reserve continues to implement its monetary policy. “As investors expect increased cap rate pressure to remain, the supply of single tenant net lease properties on the market continues to increase,” according to the firm’s latest net lease report.
Notwithstanding Q2’s increase in retail cap rates, “the perception is that the net lease retail market has been in a neutral position in recent years,” according to the Boulder Group. Cap rates for the retail sector have primarily ranged between 6.10% and 6.25% since Q3f 2015.
Proponents of net lease retail cite the sector’s strengths. These include steady cap rates despite a rising interest rate environment, along with an argument that the net lease retail sector is the beneficiary of the shift away from the traditional shopping mall.
Conversely, opponents cite rising interest rates, a recent flood of net lease retail property supply, and concentration of new construction with limited credit. “The primary sentiment amongst net lease investors is that cap rates should remain relatively stable and within the range of the past few years across all three asset classes,” according to the Boulder Group.
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