Cut the CAP….What Is It Really Worth?

Let’s Talk Truth & Q2 Changes

 

The general consensus amongst net lease professionals is that CAP rates will continue to rise throughout 2018. When the Federal Reserve “confirmed a series of interest rate hikes on the horizon”, as noted in this article from Globe St., many suspicions were reinforced in this cautious time for CRE.

 

The Facts

In Q2 reports across the industry, it is clear that retail is continuing to reflect investor sentiments with the Boulder Group reporting retail cap rates up +10 basis points with office and industrial changes falling -5 and -25 basis points respectively in Q2. Retail’s leap of 10 basis points is the largest jump since Q2 in 2011.

 

In the wake of these shifts, there are more STNL assets on the market than ever, Stan Johnson Company reporting that investment sales volume in the single-tenant retail category was just shy of $3.2 billion in the first quarter of 2018, with cap rates in secondary and tertiary markets rising due to concern over the ability to sell the property at the same cap rate in the future.

 

Fewer years left on leases and efforts by property owners to maximize their property’s value before the next spike in cap rates have also contributed to the rise in cap rates. The influx of properties to the market has developed a gap between supply and demand for the product. This has also helped contribute to the slight increase in average cap rates across the retail single-tenant net lease industry.

When pricing net lease assets we have to look at the potential motivation behind the owner’s reason for selling.

  • Alternative Investment
      • Interest Rates Inching Higher
  • Life Event or Cash Requirement?
      • Sending Kids to College
      • Emergency Hip Replacement, Etc.
  • Capitalize on Market Trends
      • Cap Rates are rising
      • Want to sell before it’s too late
  • Relationships
    • Long-standing relationship with a potential buyer who has been interested in for a while. Price is finally right to sell.

Overall, the growth of the economy is expected to hold steady through the end of 2018, barring immediate repercussions and effects from the international discussion on trades and imports. As the industry watches for the change in the economic climate, the retail sector will be in full spotlight.

View Comprehensive Q2 Report from The Boulder Group here.