2Q13 NNN Cap Rates Remain at Historic Lows

Capitalization rates for single-tenant net-leased assets remained at near-record lows in 2Q13, according to the Boulder Group’s 2Q13 Net Lease Market Report (PDF). The retail sector’s national average cap rate dropped 25 basis points to 7.00 percent, office declined 16 bps to 7.54 percent, and industrial dropped 2 bps to 8.00 percent.

Low interest rates in 1Q13 continued to influence cap rates well into the second quarter, but the 32 percent increase in U.S. Treasury yields toward the quarter’s end has sparked uncertainty among net-leased investors.

Despite the continued cap rate compression, net-leased retail, office, and industrial supply increased 14 percent overall in 2Q13. Many of the assets added to the pool were “vintage buildings” and properties with less than 10-year lease terms, according to the report.

However, change is afoot within the sector. Investor returns may start to wane in a rising interest rate environment, and cap rates for properties with rent escalations in their primary lease term will be prized as a hedge against inflation. As the year continues, net-leased investors will keep a sharp eye on rising interest rates’ impacts on property values.