Net lease investors appear to be developing a greater appetite for properties occupied by industrial tenants, according to recent reports from The Boulder Group, a net lease commercial real estate firm headquartered in Northbrook, Ill., and net lease brokerage firm Stan Johnson Co.
In its first quarter 2016 “Net Lease Market Report,” The Boulder Group reports that cap rates on transactions involving single tenant industrial assets dropped to an all-time low of 7.10 percent in the first three months of the year. Cap rates on industrial properties are still above those occupied by retail tenants (which averaged 6.18 percent in the first quarter), but they have fallen the most quarter-over-quarter, with a decline of 34 basis points. Cap rates on retail properties, on the other hand, declined by just 7.0 basis points, and cap rates on net lease assets occupied by office tenants rose by 20 basis points, to 7.2 percent.
There are also fewer industrial properties on the market than there were a quarter ago and fewer of them than either retail or office assets. In the first quarter of 2016, there were only 294 single tenant industrial net lease properties on the market—a drop 12.2 percent from the fourth quarter of 2015. In contrast, there were 3,029 retail properties on the market and 311 office properties.
A first quarter net lease report from Stan Johnson Co. shows similar trends. The firm estimates that the average cap rate on sales involving net lease industrial assets was 6.6 percent during the first three months of the year—a decline of 23 basis points compared to the average for the past 12 months.
There were 235 industrial properties traded during the period—still below the most popular class, retail (which saw 366 transactions), but above the number of office sales at 139. The average price per sq. ft. for net lease industrial assets was $88 in the first quarter—an increase of about 20 percent compared to the past 12 months.
“The final quarter of 2015 saw an unprecedented level of sales volume for single-tenant industrial properties, totaling more than $7.6 billion,” notes Lanie Rea, director of research with Stan Johsnon Co. “This helped drive annual sales volume totals to more than $21.3 billion. In early 2015, single-tenant office sales comprised the majority of dollars trading, representing 41 percent of the market in first quarter and 36 percent in second quarter 2015. Following mid-year, we saw a shift as retail stole the spotlight, taking temporary market share from the other property sectors with 37 percent during third quarter 2015. By fourth quarter 2015, investor preference shifted again, and we saw industrial lead the pack with a tremendous 44 percent market share.”
Stan Johnson reports that the average cap rate for the entire net lease market fell to 5.79 percent in the first quarter, from 6.24 percent over the past 12 months. The average price per sq. ft. went up about 10 percent, to $169.
The overall supply of product in the net lease sector declined by 3.0 percent since the fourth quarter of 2015, The Boulder Group reports, as new construction has remained limited.
“New construction properties are in the highest demand amongst 1031 and private buyers as they typically have the longest lease term,” the firm’s researchers write. “The limited supply has kept cap rates low for all three sectors despite the volatility in the 10-year treasury over the past year.”
For a complete overview of the current state of the net lease market, you can read our Net Lease Trends report.