Monday Morning Scoop - Net Lease Cap Rates Continued to Compress in Q3

Net Lease Cap Rates Continued to Compress in Q3

Cap rates for net lease properties continued to compress in the third quarter, with the quick service restaurant, automotive, and early learning sectors seeing the largest increase in onmarket properties, according to a new report from B+E Net Lease.

Industrial warehouse assets had the most compression in cap rates across all sectors in the third quarter, and B+E experts say they expect further activity across all sectors before year’s end.

“Although lease terms for single tenant industrial properties tend to be shorter than other property types, investors place their bets on high credit tenants remaining in place,” the report notes.

The cost of capital is indeed climbing: the Fed recently raised rates by 75 bps on September 21, and two additional rate increases are expected by the end of 2022. But B+E says cash-flush buyers nevertheless abound in the market who need to deploy funds by the end of the year.

“Many of these buyers are on the clock for exchanging their 1031 assets, while others are funds that haven’t fully deployed the capital they raised for 2022,” the report notes, adding that many buyers will want to close on properties that qualify for 100% bonus depreciation before the deadline of December 31.  ”With so much uncertainty surrounding the economy and net lease market heading into 2023, we expect to see increased activity for the rest of the year. With the uptick in deals expected, it’s still a great time to be a seller.”

B+E founder and CEO Camille Renshaw has previously opined that anything over $100 million will probably have cap rate compression depending on quality; the same goes, she says, for the best assets. Buyers of smaller deals are “very motivated,” and tend to be heavily motivated by 1031 exchange needs.

“As we look at the $1 million to $7-8 million subset, where primarily exchangers are playing, they’re just not as impacted by the mortgage rates because they typically don’t take on as much debt,” she told GlobeSt earlier this summer. “Their ultimate IRR is just not as impacted. And it’s impossible to buy enough product.”

By: Lynn Pollack
Source: GlobeStreet