Boulder Group: Interest rate slowdown a boon for net lease market

Expect a boost in net lease sales throughout the rest of the year if the Federal Reserve follows through on its plans to slow interest rate hikes.

Chicago-based The Boulder Group released its first quarter Net Lease Market report earlier this month. And the report contains plenty of good news for the industry.

The company’s Cap Rate Prediction Poll found that only 29 percent of investors expect a cap rate increase of at least 25 basis points by the end of 2019. That’s a big drop from the fourth quarter poll of 2018, when 62 percent of investors predicted that big of a cap rate hike.

According to The Boulder Group’s first quarter research, 39 percent of poll participants expect cap rates to remain unchanged or fall in 2019. Again, this is a big hike; Only 5 percent said the same at the end of 2018.

“In 2018, net lease investors expected the Federal Reserve to continue raising rates in 2019, which caused a pause for some investors,” said Randy Blankstein, president of The Boulder Group, in a statement. “A more favorable monetary policy by the Federal Reserve, as it relates to interest rates, should provide additional certainty in the net lease markets and result in stronger activity.”

Another positive for the net lease segment? The number of properties listed for sale is dropping, the result of an increase in net lease transactions in 2018. According to The Boulder Group, the number of net lease listings was down by 7.3 percent during the first quarter of the year, dropping from almost 5,600 in the fourth quarter of 2018 to 5,189 in the first quarter of 2019.

The Boulder Group points to an increase in net lease sales in 2018 as the reason for this decline. Year-end sales volume exceeded $62 billion in 2018, a jump of 9 percent when compared to the prior year, according to numbers from CoStar.

In another key finding from the report, the current national asking cap rate for net lease office properties is 7.10 percent, an increase from 7.02 percent last quarter and 10 basis points from a year ago when this rate stood at 7 percent.

Single-tenant industrial properties recorded a national asking cap rate dip of 9 basis points from the end of 2018 through the end of the first quarter, ending at 7 percent after the first three months of the year. For retail properties, the asking cap rate increased 2 basis points during the first quarter to 6.27 percent. That rate is up 17 basis points since the first quarter of 2018, but is up just seven basis points since the second quarter of 2018.