Net Lease Cap Rates May Increase As Pressure Softens

According to Dominic Cerminara, of Kingsbarn Realty Capital, cap rates in the net lease sector have seen immense pressure, thanks to the extreme demand and competition for product, but that may be changing.

Pressure may soften as investors shift their focus to value-add plays and repositioning core assets, which has been seen as an increasing trend. The increased competition in the net lease space and the demand for current yield continues to put pressure on cap rates as well as the length of the average lease term. However, as some institutional investors start to focus on more value-add and repositioning of core asset opportunities the pressure may lessen slightly.

Which brings a cautionary note.  While cap rates have been compressing because of increased demand, if cap rates start to increase because of lessened demand, market value of net leased assets will decrease.  If buyers are in it for the long haul, small increases in cap rates won’t matter.  For those who are buying at low cap rates in the expectation of a quick flip at the next rent increase, be careful.