Net Lease Midwest

Net lease market rolling? Thank the Fed 

Thank the Fed for net lease market's roll?,ph01
7-Eleven convenience stores are especially attractive net-lease investments today.

Net lease property investors are optimistic today. And part of the reason? You can credit the Federal Reserve.

The second quarter Net Least Market Report recently released by Wilmette, Illinois-based The Boulder Group, points to lower-than-expected interest rates as one reason why the net lease market continues to thrive across the country.

You can learn even more about the net lease market during REjournals’ and Midwest Real Estate News’ Net Lease Summit held July 25 at the University Club of Chicago in Chicago. The event, which runs from 8:15 a.m. until 3:30 p.m., brings the biggest names in the net lease, sale leaseback and 1031 Exchange markets, all ready to share their thoughts on the strength of this commercial segment.

The Federal Reserve boosted interest rates three times after 2018. But now it’s expected that the Fed will cut its interest rate at its upcoming July meeting. As The Boulder Group reports, prognosticators expect that the Fed will cut its rate at least one more time in the near future.

At the end of the second quarter of 2019, the 10-year treasury stood at 2 percent after reaching as high as 3.24 percent in the previous 12 months.

This has resulted in decreasing cap rates in the net lease sector. According to the Boulder Group, cap rates decreased across all three major sectors – retail, office and industrial – in the second quarter of 2019. The retail sector saw the greatest compression, with cap rates here falling by 4 basis points to 6.23 percent. This was the first quarter that cap rates in the retail sector followed after five consecutive quarters of rising rates.

Cap rates in the office sector fell by 3 basis points. In the industrial sector, cap rates fell by 1 basis point.

“With many investors believing we are in the late stages of the real estate cycle, investors are somewhat more narrowly focused, targeting properties that can withstand a recession or uncertainty in the market,” said Randy Blankstein, president of The Boulder Group.

An example of this type of property? Blankstein pointed to newly built 7-Eleven convenience stores. These properties experienced the greatest quarter-over-quarter compression of cap rates, with these rates falling 12 basis points to 4.88 percent.

Jimmy Goodman, partner with The Boulder Group, said that the spread between asking price and closed cap rates declined in the second quarter when compared to the first.

“The narrowing of the bid-ask gap illustrates the current competitive marketplace for net lease properties as investors, both private and institutional, seek safe and stable returns,” Goodman said.

Both Goodman and Blankstein say that investor demand for the net lease market will likely mean higher transaction volume than experts originally forecast in early 2019. Both said that they expect to see sale volume in the net lease space increase as the year moves on.

Interested in even more conversation about the net lease market? Register for REjournals’ 5th annual Net Lease Summit here.