Why Net Lease Cap Rates Hit New Lows

In the third quarter, cap rates in the single-tenant net lease sector dropped to historic lows for office (6.80 percent) and industrial assets (6.70 percent), according to a new report by The Boulder Group.

The reasons behind these record lows were “significant investor demand combined with limited supply of quality net lease assets,” Randy Blankstein, president of The Boulder Group, said in a prepared statement.

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He added that the 10-year Treasury yield decreased in the third quarter to its lowest levels since the first quarter of this year.

Despite the fact that net lease asset pricing reached all-time highs and helped persuade owners to put office properties on the market, the report noted that supply in the industrial sector actually declined by more than 11 percent in the third quarter.

Jimmy Goodman, a partner at Boulder, said in a prepared statement that the significant demand for industrial assets is causing many transactions to occur prior to a public marketing process. This contributed to the decline in supply of net lease industrial product, he explained.

Boulder expects net lease transaction activity to stay active throughout the rest of this year and to continue through 2022. The potential pitfall is that demand could collide with supply pipeline issues.

Looking ahead

Since the American Families Plan was announced at the end of April, investors have been paying close attention to potential tax changes that might arise from it. The bill calls for increases in the top brackets for both income tax and capital gains tax.

In mid-September, Boulder notes, the House Ways and Means Committee released its tax proposal, which did not include changes to or the elimination of Section 1031 exchanges.

Any legislative changes “could impact the overall net lease market,” according to Blankstein.

Read the full report by The Boulder Group.