Despite widespread anticipation of instant cap rate expansion due to the Federal Reserve’s recent policy changes, an immediate effect on didn’t turn out, according to a report released by the Boulder Group.
After the Feds announced three rate hikes since December, the 10-year treasury yield declined since the beginning of 2017, Boulder Group reported. There is an expectation that cap rates will rise between 25 and 50 basis points by the end of 2017, so there is some push back on pricing due to the unusually low cap rate environment.
In the second quarter of 2017, the spread between asking and closed cap rates widened across office retail and industrial, according to Boulder Group. The spread increased by 6 basis points respectively. The spread in the net lease office sector increased by 5 basis points to 31 during the same period. This change could alter the perception that the market is favorable only for sellers.
The majority of failed retailers occurred outside of the single tenant realm, Boulder Group said. The problems have been isolated to department stores and tenants frequently located in enclosed shopping malls. As a result, the net lease market is benefiting as capital continues to enter the market.
The net lease market is expected to remain active in 2017 as investors continue to favor net lease, according to Boulder Group. In June 2016, the Walgreens and Rite Aid merger fell through and Walgreens announced it would acquire 2,186 stores from Rite Aid. Following a year of gridlock associated with the merger, pharmacy transaction volume should experience a surge as the uncertainty surround this transaction has ended. Continued upward pressure on interest rates will cause investors to carefully monitor the capital markets as the majority of net lease participants expect cap rates to increase in the coming year.