Wednesday, July 21, 2010

Looking Back: NNN Cap Rates

Back in May we did a story dealing with the possibility of net lease cap rate compression based off a Wall Street Journal article.

Specifically, the article said: “in recent months, cap rates have been falling because property prices nationally are rebounding. More investors are going after fewer high-quality properties, driving prices up.”

Now that we are a few months advanced, how does this statement stand up?

Certain areas and products have certainly seen cap rate compression. Highly trafficked urban areas such as the Washington DC metro area and popular tenants like Walgreens and CVS are exemplars of this. However, on average the trend has been more towards stabilization.

Our own cap rate report, released in late June, has net lease retail cap rates at 8.10%; a slight increase from 8.00% in the fall of 2009. Real Capital Analytics confirmed our current estimates in their 1Q Single Tenant Retail report by also citing a current average of 8.10%. They differed slightly in their 4Q 2009 averages, highlighting a rate of 7.7%. Nonetheless, a similar trend is projected. Cap rates have increased slightly but at a much reduced pace from what was seen earlier.

Though we are not experiencing overall cap rate compression the areas and products which are succeeding represent great investment opportunities. Furthermore, cap rate stabilization points to a secure market that is more attractive to investors.