2010 Cap Rate Report

“Are we there yet? Are we there yet? Are we there yet?”

- Bart Simpson

Are we there yet? No, but the steady rise of cap rates in 2009, born of the recession, bail-outs, defaults, and fall in consumer confidence has given way to a modest stabilization as financial indicators have subtly improved in the first quarter of 2010. Across the country, decreased transaction volume brought on by a still conservative lending environment and the impact of the recession in all but a few standout markets has prevented a true return to normalcy. Those factors have also turned investors towards key primary markets where real estate fundamentals remain strong, the impact of the recession is less severe and debt placement more readily available. Cap rates in these select primary markets have stabilized and even dropped to an extent as the influx of investors from across the country has led to a scarcity of quality inventory. The net result of the transaction volume in these primary markets is a modest downward compression of cap rates across all sectors.

Net lease investments continue to represent a large portion of the transactions taking place, proving that there is a significant flight to quality as buyers seek out properties with strong credit tenants. Single-tenant net lease retail properties, priced between $1M and $10M, have become the sweet spot for many investors and 1031 buyers. A quick analysis of these types of transactions points to the possibility of 2010 being a plateau year with potential cap rate compression coming in 2011. Today, most net lease properties have been trading at cap rates between 6.50% – 8.75%.

For more, check out our full report.