In the first quarter, the single-tenant net lease sector reached historic lows for the retail and industrial sectors, according to new research from The Boulder Group.
In Q1, single-tenant retail cap rates compressed by nine basis points to 5.91%. Industrial cap rates fell four basis points to 6.71%, while office cap rates rose five basis points to 6.95%.
For retail and industrial, the story of Q1 was strong demand with limited quality supply. “There is still this flight to safety,” Randy Blankstein, president of The Boulder Group, tells GlobeSt.com. “The stock market is all over the place, as is the bond market. One minute everyone thinks interest rates are going up substantially, and the next moment they pull back. With all this uncertainty, there’s still a flight to safety, and everyone is trying to grab a safe yield.”
While there was an overall 9% increase in properties on the market, Blankstein says a lack of high-quality assets with long-term leases in the net lease market remains. Many passive investors shifted their focus to essential business-related tenants.
“Some of the essential business tenants commanded the most attention from investors and warranted the lowest cap rates in the sector,” says John Feeney, senior vice president, The Boulder Group. “In the first quarter of 2021, 7-Eleven, CVS and McDonald’s cap rates were 4.90%, 5.00% and 4.00% respectively for assets that were recently constructed.”
While The Boulder Group didn’t have a final number on Q1 transaction volume, Blankstein thinks sales volumes will be lower year-over-year.
“It will be down slightly again because the stuff that is trading is all the good stuff—the Chick-fil-A’s, CVS’s and Starbucks,” he says.
Blankstein expects transaction volume to remain active as vaccinations continue and the economy continues to recover from Covid-19. Both 1031 investors and private capital investors will chase properties with long-term leases, strong tenants and top metro locations. This should keep cap rates at a low level.
Investors will continue to wait for non-essential retail, like fitness centers and movie theaters, to come back. “It’s a wait-and-see on what numbers they post in the second and third quarter,” Blankstein says. “If they’re good, people will be happy to get back in. But, it’s really hard to tell how many people have come back to the gym. Is it 95%? Is it 80%? There is a huge difference in profit margins between those two? Movie theaters have the same concerns.”
In the first quarter, Blankstein said that 1031 investors continued to be active bidders. “The 1031 market is starting to come back from a very quiet Q2 and Q3 last year,” he says.