The first quarter of 2017 can be summed up with a single word: Stable. According to our Calkain research team, the entire market only moved 11 bps. This lack of movement was driven by the Dollar Store and Pharmacy sectors.
The Dollar Store sector saw cap rates fall by 16 bps, in line with the overall market movement. The movement of the major tenants, Family Dollar (-28 bps) and Dollar General (-15 bps), paints a deceiving picture. When looking at prime deals (10+ years remaining on the lease), the movement goes from small to near zero. Prime Family Dollar deals fell a mere 16 bps to 6.18% while prime Dollar General deals fell by 3 bps to 6.65%.
In the Pharmacy sector, the story is much of the same. On the whole, there was some movement but when evaluating prime deals this movement disappears. On the surface, CVS transactions have become significantly more valuable with cap rate compression of 53 bps. After filtering out the short term deals, CVS moved from 5.66% to 5.58% yet this does not indicate any significant movement. Walgreen’s upward movement runs counter to the overall market’s downward movement and the Pharmacy sector’s near zero movement. After filtering the short term deals, Walgreens’ experienced a small compression of 12 bps to 5.66%.
These are only two sectors of the net lease market place, so they don’t necessarily represent what was going on globally. The Quick-Service Restaurant segment (QSR) had a slight downward movement in cap rates. This was primarily driven by sales of newer stores. The Big-Box and C-Store sectors also showed small downward movement in cap rates. This was mainly due to a change in the credit profile of the tenant’s quarter over quarter. Sales of deals with stronger credit pulled the sector average down.
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