Overall, net lease cap rates fell by 25 basis points
in 2011. The primary drivers of this trend are lack of product (especially high
quality product) and an ease in lending conditions. Construction of new net
lease product continues to flow at a trickle while financing has become more
available with local and regional banks competing with insurance companies for
credit tenant deals. Investors have shown the willingness and ability to invest
but are hindered by lack of product to satiate their demand. This lack of
supply and increase in demand has forced prices up and cap rates down many
would argue that 2012 promises to be a seller’s market in 2012. It is worth
noting that these numbers illustrate the average trend in net lease cap rates
and the net lease market itself is highly diverse depending upon tenant, lease
terms and location.
Though these factors have always been significant,
their effects have recently compounded. Investors have shown a preference for high
quality tenants in prime urban and suburban locations and are willing to pay
some of the highest prices in recent years to obtain them. Cap rates in prime
markets can be up 125bps lower than the charted averages of many segments.
However, investors are increasingly showing interest in properties containing
lower credited tenants or located in secondary locations exchanging risk for
higher returns. Net lease investments continue to gain traction as an
alternative investment instrument for cash flow and yield investors.
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