Last week Calkain attended ICSC Mid-Atlantic Conference & Deal Making held at the Gaylord Hotel in National Harbor. It was a very well attended show rivaling the recent New York ICSC show in December. Both shows are a pre-cursor to RECon which will take place in May of this year at the Las Vegas Convention Center. There seems to be an underlying acknowledgement amongst net lease brokers, developers and investors that the cap rate environment has begun to change. Offering prices are still aggressive based on 2016 levels, especially in the primary markets with investment grade tenants. We are seeing adjustments in price in the early stages of 2017 which is the result of the Fed increase to the interest rates back in December of 2016.
Year to date we are seeing a growing spread between asking and offer prices. Buyers are seeing the opportunity to increase their returns based on these new interest rate decisions. Typically, at least in our markets, the spread between asking price and offer has been quite transparent and is 15 to 25 bps, where as we are now seeing offers come in with a 50 to 75 bps difference. We aren’t seeing deals actually close at this spread, yet we expect to see this gap tighten over the course of 2017.
The single tenant net lease market place is seeing an influx of activity as owners are wanting to get their properties listed and marketed prior to the shift to a potential buyers’ market. In previous years, the supply was very limited because sellers continued to see great appreciation in their net lease investments. As we see Wall Street hitting the Dow Jones of 20,000, we still look to the net lease market as a barometer of safe leased returns that are guaranteed through investment grade tenancy over long lease terms. The recent uprise in Ten Year T-bills, up 82 bps in Q4 alone, in comparison to cap rates has decreased to 3.97%, according to Calkain’s most recent Quarterly Cap Rate Report.
According Chicago Federal Reserve President Charles Evans, we should expect two additional rate hikes in 2017 although “a bit later, given the lags in monetary policy and other factors.” This runs parallel to current cap rates and transaction activity. Prices will lag for the next six months, at which point, investors will get serious as they begin to look at fourth quarter activity. Inventory will hit the market with sellers trying to take advantage of pricing prior to year-end.
Cap rates will still be consistent through 2017 with gradual increases. The ability of a seller to be more aggressive in pricing may wane as buyers continue to seek opportunity in the single tenant net lease marketplace. It will still be an active market due to the investment parameters of institutional funds, family partnerships, and individuals. Moreover, the nature of net lease investments will always be a safe harbor for consistent returns and appreciation.