The result of these multiple trends, not surprisingly, is that cap rates are low and getting lower. Namely, net lease cap rates declined by five basis points to just over 7.2% in the first quarter on average.
RESTON, VA-Earlier this year, locally-based Calkain Cos., and New York-based Chandan Economics announced anew mission: they would partner to provide research in one of the few areas of commercial real estate.Hipp: "Given where Treasuries are headed, people are looking for yield."That day is here. The two firms are getting set to release their first report and have given GlobeSt.com an exclusivesneak preview. The report covers trends in the macro economy with an eye on how these impact the net leasespace.It has found that the fit-and-start nature of the recovery has reinforced the appeal of net lease assets especially thosewith long term, high quality tenants. In addition, the sector is grappling by a lack of supply. The result of these multipletrends, not surprisingly, is that cap rates are low and getting lower. Namely, net lease cap rates declined by five basispoints to just over 7.2% in the first quarter on average.These rates, of course, fluctuate based on geography and tenant type. California and the Northeast, for example,claim the lowest cap rates.The report also notes there is stronger investor demand for bank branches, pharmacies, and the best-performing fastfood chains. Bank branches registered average cap rates of 6.1% in Q1, for example--100 basis points lower than the7.1% average cap rate for pharmacies.Investors, however, can be counted on to show a high degree of sophistication in their acquisitions not only acrossclasses of tenants but specific tenants, as well. Sam Chandan, president and chief economist of ChandanEconomics, tells GlobeSt.com. “Some pharmacy and bank branches are trading at sharply lower cap rates than theirpeers, even after controlling for variation in property quality and time to lease maturity.” For these most covetedassets, he says, debt yields are lower, as well, meaning that lenders perceive many of the same differences asrelates to credit risk.
The most aggressive cap rates Jonathan Hipp, CEO of Calkain, says he has seen has been in the mid 4s for“McDonald’s-type credit.” Expect compression to continue, he tells GlobeSt.com. “Given where Treasuries areheaded, people are looking for yield. Also, there is so much buyer interest in this product now we have gotten to thepoint where we almost don’t need new buyers. What we would like to have is more product.”Not that the demand-supply imbalance will give investors pause, Hipp adds. “With everything going on, from theuncertain employment picture to the European debt crisis, at end of day people are still cautious on the economy.With the right combination of credit, location and length of lease it is a great time to be a seller in the net leasemarket.”Or even a buyer, he says—but with a caveat. In this environment, current buyers should beware that an eventual exitstrategy could happen in a period of higher interest rates and a diminishing flight to quality.