Randy Blankstein, President of The Boulder Group in Wilmette, IL, an investment firm specializing in net rental properties.
WILMETTE, IL – Boulder Group reports that recent Federal Reserve policy changes have renewed optimism among net rental investors, driven by falling cap rates and narrowing bid-ask spreads in the asset class.
In its just published 2Q2019 Net Lease Market Report The Boulder Group states that net rental cap rates for single tenants across all three main sectors – retail, office and industrial property – fell in Q2 2019. The Boulder Group Report predicts that cap rates for the net leasing sector should be under downward pressure, but will remain relatively stable in 2019.
In particular, the retail sector saw the largest compression of the cap rate by four basis points to 6.23%. Additionally, this was the first quarter of the retail cap rate downward move after five consecutive quarters of the upward trend. Cap rates in the office and industrial sectors compressed by three basis points or one basis point.
"The net rental market, especially retail real estate, is typically closely related to investment returns, and thus to the work of the Federal Reserve," said Randy Blankstein, president of Wilmette, IL-based The Boulder Group, an investment firm that looks to Specializes in net rental properties.
After measures in the Federal Reserve's monetary policy in 2018 that saw three rate hikes be made, the Boulder Group expects a rate cut at the Fed's upcoming July meeting.
A majority of forecasters expect at least one more cut in the near future, the company adds. Based on current Fed activity, the 10-year treasury was 2.00% at the end of the second quarter of 2019 after hitting 3.24% in the past 12 months.
As the retail industry evolves, net rental investors are placing increasing emphasis on tenant credit quality and lease terms. "With many investors believing that we are in the late stages of the real estate cycle, investors are a bit more focused and targeting properties that can withstand a recession or market uncertainty," says Blankstein. "For example, newly built 7-Eleven properties on a single property / brand basis recorded the greatest compression of the cap rate compared to the previous quarter from 12 basis points to 4.88%."
In view of the downward pressure on cap rates in all three sectors, the spread between ask and closed cap rates decreased compared to the previous quarter. Jimmy Goodman, Partner at The Boulder Group, adds: "The narrowing of the bid-ask gap illustrates the current competitive market for net rentals, as both private and institutional investors seek safe and stable returns."
"With all of these factors," Blankstein and Goodman say, "investor demand for the net rental market is likely to exceed the transaction volume forecast in early 2019." We will see the sales speed increase as the year progresses. "
Adds Blankstein, "Net lease real estate investors will carefully monitor capital markets and the impact on pricing as the market expects several rate cuts from the Federal Reserve in 2019 and possibly 2020."