Though net lease transaction volume for 2020 is expected to be significantly lower than 2019, due to COVID-19, cap rates in the retail, office, and industrial sectors reached a new all-time low in the third quarter 2020, according to The Boulder Group’s recent net lease report.
Cap rates compressed by 19, 10 and 11 basis points respectively for retail, office and industrial during 3Q20 compared to the previous quarter. The Boulder Group attributed the cap rate compression in the third quarter 2020 to the Federal Reserve’s recent announcement, which suggested interest rates will remain near zero at least through 2023.
Investors’ “flight to quality” also contributed to the cap rate compression. With COVID-19 continuing to impact the global real estate sector, net lease investors are increasingly picky about the types of properties they want to buy.
Retail assets including movie theaters, gyms, and second tier casual dining have experienced the biggest negative impact, forcing owners to hold off on selling unless they have no choice. That’s one of the reasons supply of net lease properties experienced a sharp decline of approximately 9% in the third quarter.
Notably, the retail sector experienced its largest cap rate move since 2014 as private and 1031 exchange investors aggressively sought the lower priced assets this sector provided. As a result, sellers of high-quality net lease properties were able to price their assets to a level not previously seen as they look to take advantage of investors more conservative acquisition criteria.
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