Retail Cap Rates Remain at Historic Low

CHICAGOCap rates for single tenant net lease properties have fallen steadily for several years, regularly hitting new historic lows each quarter as more investors put in bids. In the third quarter of this year, however, the national cap rates for retail properties held steady at 6.5%, according to new research by the Boulder Group, perhaps indicating that the long plunge in that sector has bottomed out.

The number of retail properties on the market also held relatively steady and helped keep the rates level. “The supply of retail properties increased by only 3.1% from the second quarter to the third quarter as new construction remains limited with the exception of the dollar store sector,” noted Boulder, a commercial real estate firm located in suburban Chicago.

Dollar store operators stand out as the nation’s most aggressive retailers and have added several thousand new locations over the past two years. “This is the most new construction by number of stores than in any net lease sector out there today,” Blankstein told GlobeSt.com. “The dollar stores have been in a race to outpace one another.” He expects that developers will finish as many as 1,500 new stores this year. However, the most recent attempts to acquire the Family Dollar chain should dampen investor interest “as people wait to see how this plays out.”

Cap rates for the office sector did continue sinking, this time by 37 bps to 7.4% while cap rates in the industrial sector rose slightly by 3 bps to 8.0%. Unlike the retail sector, during the third quarter, the supply of office and industrial properties increased significantly, by 30% and 21%, respectively. “Owners of these assets have attempted to take advantage of the current low retail cap rates by enticing investors with higher yields offered by office and industrial properties,” Boulder found.

And the firm expects that strong demand will continue due to the stable cash flow typically generated by net lease products. Although the uncertainty in the market for dollar stores will keep some investors on the sidelines, demand should remain strong for newly-constructed quick service restaurants, casual dining restaurants and auto part stores. “With steady capital markets, market participant expectations are for cap rates to hold steady or rise slightly by the end of the year.”

Source: Globe St Brian J. Rogal October 2nd 2014