Unlike most of us, there was no rich celebration of the new year for the net lease sector. No massive resolutions, in fact, not much change at all. If there is a watchword for 2019, it seems to be expect more of the same, at least in terms of the cap rate picture.
In fact, as we pointed out in our most recent quarterly report, tracking the single tenant net lease cap rate against the 10-year Treasury, both have been virtually flat going back to the fourth quarter of 2016, and of the two, cap rates were the flatter! The average cap rate of 2018 hovered around 6.2 percent, which was only a five-bp spread over the prior year. The last quarter of 2018 continued that trend, with national cap rates moving up over Q3 only 3.2 bps (from 6.55 percent to 6.58 percent).
Against the no-news (not to be confused with fake news!) of cap rates, of course, we have a still-strong economy, in which we see rents continuing to rise right along with the price tag on deals and a growing inventory of assets from which interested investors can choose. In other words, the fundamentals are sound.
Who’s moving that product? In general, we’re finding that larger investors (REITs, for instance) and developers are interested in selling, especially given the comparative size of their portfolio of assets. Smaller players are holding onto their properties longer in an effort to maximize profit.
There are two caveats that accompany that inventory scenario, especially in this post-plateau market. The first is that, given the aforementioned uptick in rents, investors rolling the dice on big-ticket assets are taking the chance that, should that rent go away, they can replace it with a new tenant. The second is that, if our field intelligence is right (and there’s no reason to doubt it) it’s a window that won’t be open for long, and our brokers think that as the year progresses, we’ll pass the peak of available inventory.
Now, just a word about this post-peak market. Above all else, this is really the governing mindset of the new year. We still have a long runway ahead of us. None of the market intel points to a major correction before we once again don our silly plastic hats and celebrate another new year. Any cautionary notes you’ve picked up here are only the signs of slower growth.
With fundamentals still strong, and given that extended runway, we remain bullish on activity for the year–and beyond. So should investors.
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