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4/9/2015 Retail Cap Rates Hit Historic Low - Daily News Article - GlobeSt.com
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Brand name retail, like this ChicagoStarbucks, remain the most popular
Brian J. Rogal is a Chicagobased freelance writer with years of experience as aninvestigative reporter and editor, most notably at The Chicago Reporter, where heconcentrated on housing issues. He also has written extensively on alternative energyand the payments card industry for national trade publications.Bio | Email
Last Updated: April 2, 2015
Retail Cap Rates Hit Historic LowBy Brian J. Rogal | ChicagoGet the Windy City's commercial news in your email with GlobeSt.com's Chicago AM Alert. Keep up with industry news, activities and profiles. Sign Up Today!
CHICAGO—Equity continues to enter the commercial real estate sector and push down cap rates for net leaseproperties, according to a new report from the Boulder Group, a commercial real estate firm located insuburban Chicago. After hovering steady at 6.5% for several quarters, cap rates in the first quarter of 2015 forthe single tenant net lease retail sector reached a new historic low of 6.4%. Furthermore, a renewed faith in thenation’s industrial sector resulted in a precipitous drop from 8.03% to 7.7% for industrial properties. Office caprates 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 ofBoulder, tells GlobeSt.com. "The brand name is what attracts investors initially and then they move on to theother 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 theAmericas group at Cushman & Wakefield, recently said. “Trends in supply and demand are favorable across all major and secondary markets, with anoverall decline in vacancy,” added John Morris, C&W’s leader, industrial services for the Americas. The firm recently pegged the vacancy rate at just6.7%.
Still, investors will continue to show the most interest in retail properties, Blankstein says. And 1031 investors will continue to dominate the net leasemarket because they can pay more than institutions due to tax benefits received and an ability to accept lower returns. "In today's market mostinstitutions 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 generatea great deal of competition when they hit the market. For example, Boulder found that newlyconstructed Walgreens, McDonald’s and 7Elevenproperties 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 arecommanding the highest prices. Recently constructed Walgreens, CVS and Family Dollar properties experienced cap rate compression of 25, 12 and25 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 ininterest rates and subsequent softening in asset pricing. “Sellers will continue to aggressively price assets in attempt to achieve favorable cap rates insale transactions; however the expectation is that cap rates should remain relatively stable in the upcoming quarters.”
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