Historically Low Net Lease Cap Rates Are Now on the Rise

Cap rates are projected to keep rising in Q4; the only question is by how much.

According to NNNetAdvisors, average net lease cap rates increased five basis points to 5.44% in the third quarter, continuing their upward trend after reaching an all-time low in the second quarter.

However, according to the firm’s analysts, cap rates for the industry are still at their lowest point in 12 years and have lagged in responding to changes in the market. In the third quarter, the difference between the 10-year Treasury and medical cap rates fell to 1.5%, a 12-year low, down from 4% from the previous year.

According to NNNetAdvisors experts, the industry is under pressure due to the shrinking gap between the cost of capital and net lease cap rate levels, which is pushing prices higher and reducing sales volume. While institutional buyers try their utmost to either hold put or push pricing as far as they can, exchange purchasers continue to be motivated. Since the present prices for stocks, bonds, and other more liquid investments provide a more risk averse approach and higher short-term returns, many private purchasers with dry powder continue to patiently wait out the net lease market for improved buying conditions.
The average days on market increased by 8 days to 142 days in the third quarter, while the difference between asking and sales price increased “dramatically” from 2.71% to 4.29% below the asking price.
In Q3, cap rates for restaurants, auto-related businesses, bargain retailers, and pharmacies tended to follow general market trends, increasing either slightly or not at all. In the drugstore industry, cap rates for CVS and Walgreens sites are comparable to those in Q2, while cap rates for Rite Aid sites increased to 7.7%, in accordance with the brand’s historical tendencies. Bank buildings were the only exception to the trend of declining property sales volume, as we saw only top tier properties trade ownership.
According to a study from NNNetAdvisors., ” As we move towards the last quarter of the year, the question seems to be how long will it take for the net lease market to react to rising interest rates.” The report also noted that While many investors search for net lease arrangements where the return and risk profile match their present expectations, other more liquid investment opportunities continue to respond in real time. In Q4, cap rates are anticipated to rise further; the only question is by how much.
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