Discussion on cap rate for retail properties.

1. 4/9/2015 Retail Cap Rates Hit Historic Low - Daily News Article - GlobeSt.com
http://www.globest.com/news/12_1079/chicago/netlease/Retail-Cap-Rates-Hit-Historic-Low-356689-1.html?zkPrintable=true 1/1
Brand name retail, like this Chicago
Starbucks, remain the most popular
Brian J. Rogal is a Chicago­based freelance writer with years of experience as an
investigative reporter and editor, most notably at The Chicago Reporter, where he
concentrated on housing issues. He also has written extensively on alternative energy
and the payments card industry for national trade publications.
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Last Updated: April 2, 2015
Retail Cap Rates Hit Historic Low
By Brian J. Rogal | Chicago
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CHICAGO—Equity continues to enter the commercial real estate sector and push down cap rates for net lease
properties, according to a new report from the Boulder Group, a commercial real estate firm located in
suburban Chicago. After hovering steady at 6.5% for several quarters, cap rates in the first quarter of 2015 for
the single tenant net lease retail sector reached a new historic low of 6.4%. Furthermore, a renewed faith in the
nation’s industrial sector resulted in a precipitous drop from 8.03% to 7.7% for industrial properties. Office cap
rates rose slightly to 7.35%.
Retail assets have long commanded the lowest cap rates due to demand from private and 1031 investors who
“prefer retail over office and industrial due to their familiarity with the tenants,” Randy Blankstein, president of
Boulder, tells GlobeSt.com. "The brand name is what attracts investors initially and then they move on to the
other criteria." Retail properties typically have long leases, lower prices and triple net lease structures that allow
these owners to remain largely passive.
The 33 bps decline among industrial assets may not be surprising considering how much the outlook has improved for the industrial economy.
“Strengthening fundamentals throughout North America support a positive forecast for the next three years,” Maria Sicola, head of research for the
Americas group at Cushman & Wakefield, recently said. “Trends in supply and demand are favorable across all major and secondary markets, with an
overall decline in vacancy,” added John Morris, C&W’s leader, industrial services for the Americas. The firm recently pegged the vacancy rate at just
6.7%.
Still, investors will continue to show the most interest in retail properties, Blankstein says. And 1031 investors will continue to dominate the net lease
market because they can pay more than institutions due to tax benefits received and an ability to accept lower returns. "In today's market most
institutions are unable to get the yield they need under a 6.25% cap rate."
Most investors are looking for newly­constructed assets with investment­grade tenants, and those types of properties are in short supply, and generate
a great deal of competition when they hit the market. For example, Boulder found that newly­constructed Walgreens, McDonald’s and 7­Eleven
properties saw cap rate declines of 5, 25 and 13 bps respectively in the fourth quarter.
As limited opportunities exist for long term leased properties to investment grade tenants when compared to the investor demand, these assets are
commanding the highest prices. Recently constructed Walgreens, CVS and Family Dollar properties experienced cap rate compression of 25, 12 and
25 basis points respectively in the first quarter.
The net lease market should remain robust for the rest of the year. However, Boulder also expects that investors will carefully watch out for a boost in
interest rates and subsequent softening in asset pricing. “Sellers will continue to aggressively price assets in attempt to achieve favorable cap rates in
sale transactions; however the expectation is that cap rates should remain relatively stable in the upcoming quarters.”
Don't miss RealShare NET LEASE in New York on April 15­16. Network with the key players in net lease.
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