Improving Net-Lease Market Fundamentals Spur Transactions

Decreased interest rates, greater financing availability, and a large supply of properties available for disposition contributed to a surge in single-tenant net-lease asset transactions at the end of 2010, according to The Boulder Group’s 4Q10 Net Lease Market Report.

Based on these favorable conditions, increased investor activity caused substantial capitalization rate compression for prime single-tenant assets, such as Walgreen’s, which experienced a 92 basis-point drop from the beginning of the year. According to the report, the single-tenant net-lease market transaction volume last year accounted for one in every three closed real estate investment sales.

As 2011 continues, the substantial cap rate compression from 2009 and 2010 for core net-leased assets will subside, ushering in changes for the single-tenant sector. Rising interest rates are poised to impact the sector the most, along with a continued lack of new development and a decrease in supply resulting from high sales volumes last year. Rising cap rates and declining prices also will make owners more reluctant to sell than they were in the recent past when cap rates were compressing. The proposed new Financial Accounting Standards Board requirements are likely to have a major impact on corporations’ buy-versus-lease decisions in the near term as well.

Overall, national single-tenant net-lease market fundamentals should remain stable in 2011, but the transaction activity levels that occurred in 2010 are not likely to continue. Many sophisticated net-lease participants are starting to adjust their business models based on lower transaction volume and the new market realities.