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Net Lease Cap Rates: Two Different Views of Where They’re Going
Two views of net lease cap rates, two different conclusions on where they’re headed. The Boulder Group’s third-quarter report found that cap rates increased slightly for all three sectors—retail, office and industrial—while B+E sees continued compression in most sectors along with an influx of new properties on the market.
“As the Federal Reserve continues to increase rates in attempt to curb inflation, debt costs have increasingly put upward pressure on cap rates for buyers of net lease properties,” the Boulder Group reported. “As economic pressure mounts, formerly opportunistic sellers removed properties from the market that were attempting to take advantage of the historically low cap rate environment.”
Accoridingly, the Boulder Group reported that the supply of net lease properties decreased by more than 12% in Q3 when compared to the prior quarter. “Furthermore, buyers and sellers have yet to agree on pricing levels given the current environment and a period of price discovery continues.”
B+E noted that following the Fed’s 75-bp rate increase last month—its third consecutive rate hike of this magnitude—and with two more increases expected by year end, “the feeling is that these increases will be the tipping point for the peak pricing and record-level cap rates we’ve been seeing in the market. We already see the effects of this as lenders are requiring borrowers to bring more capital to the table: deals that used to require 75% LTV are now around 55%-60% LTV.”
That being said, B+E noted that “there are a lot of cash-flush players needing to deploy capital by the end of the year. Many of these buyers are on the clock for exchanging their 1031 assets, while others are funds that haven’t fully deployed the capital they raised for 2022.
“Many buyers will want to close on properties that qualify for 100% bonus depreciation before the deadline of Dec. 31, 2022,” according to B+E’s Q3 report. “With so much uncertainty surrounding the economy and net lease market heading into 2023, we expect to see increased activity for the rest of the year.”
- ◦Sale/Acquisition
