Use by a firm's other offices requires multiple individual site licenses or a corporate multi-site license. The CRS captures 3,600 cap rate estimates across more than 50 geographic markets to generate key insights from a wealth of data. With growing inflation and expected hikes in US Treasuries in 2022, NNN retail across virtually all asset types saw a compression in cap rates. "Low interest rates and substantial amounts of investment capital chasing stable yields created an active net lease market. In a gross lease, the commercial property owner pays for them. If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information. to historic lows, the government is set to invest a record amount in national infrastructure, and wages are rising across the board for workers as companies compete for talent. Beyond the arrangements for paying rent, a ground lease has several unique features. Additionally, we needed 80 percent financing on our multimillion-dollar purchase. At First National Realty Partners, we have a significant amount of experience with net leased assets and a firm understanding of what drives cap rates for them. By 2022, ALDI will bring its total number of US stores to nearly 2,500. www.aldi.us Average Cap Rate 4.18% 12 mo avg with 10+ yr lease term Average Property & Lease Credit Rating Average Cap Rate Trend 4.65% 2021 4.35% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Average cap rates for single-tenant industrial assets have compressed substantially in recent years, falling more than 100 basis points since the mid-2010s. Using a market capitalization rate of 9.00 percent indicates that net income of $13.43/SF would need to be achieved to justify an investment of $149.26/SF ($149.26 x .09 = $13.43); assuming vacancy and collection loss of five percent, an absolute net rental rate of $14.14/SF would be needed to achieve this level of net income ($13.43 0.95). The impact of the pandemic forced the banking industry to dive into new digital banking transformation as bank branches continue to pivot to new business models. In other words, the lessee must make enough profits during the lease to pay for the lease and the improvements. Ronny found us several commercial properties which met our desired needs. Moodys Analytics reports retailers should see notable gains, forecasting 6.2% growth in core retail sales through 2021. RealtyRates.com is headquartered in Bradenton, Florida - Offices in New York, Boston, Chicago, Atlanta, Dallas, Denver, San Francisco, Los Angeles,and Honolulu. We expect to see more of the same in quarters moving forward as developers and investors seek sites suitable for and/or equipped with new drive-thru prototypes for these brands. is one of the countrys leading private equity commercial real estate investment firms. Given the medical industry has been deemed as one of the most important sectors due to the correlation impact of COVID-19, single tenant net leased medical properties saw a slight compression in average cap rates, recording at 6.78% in Q1. Pharmacy continues to be a strong asset class for 1031 investors seeking investment grade credit tenants. In the first quarter national asking cap rates in the single tenant bank ground lease sector decreased to 5.35%, according to the 2021 Net Lease Bank Ground Lease Report. Since the beginning of the pandemic, average cap rates have slipped into the high 5.0 percent range and at mid-year 2021, sat at 5.9 percent. A ground lease is more complicated than regular commercial leases. In fourth quarter, activity reached $18.3 billion, representing a 37 percent jump from the previous quarter and a 38 percent increase from fourth quarter 2020. For the third consecutive year, the median term remaining for the bank ground lease sector was below 10 years., Net lease investors will continue to monitor the bank sector following the Covid-19 environment which temporarily closed many bank branches aside from drive-thrus. In return, the landlord asks for higher rent on the property. Annual Interest Rate - The annual rate to be paid on the mortgage. As schools continue to open their campuses to students, cap rates for educational NNN properties compressed by 51 bps in Q1 with average lease terms increasing to 14 years. The average cap rate compressed by 39bps from Q4 to Q1 while the average lease term has remained at 9 years. The demand on the educational sector has been changing and evolving due to the impact of COVID-19. 2 Bedrooms Rental Houses in Istanbul. Typically, ground leases are triple net. In the first quarter national asking cap rates in the single tenant bank ground lease sector increased to 5.47%, according to the Q12020 Net Lease Bank Report This represented a 17 basis. As can be expected, sectors classified as essential business with more capabilities to adapt to a changing marketplace have been less affected than others. In addition, interest rates are rising, inflation is at a 40 year high, and housing affordability continues to be a major issue. Average cap rates compressed by 56bps to 5.58% during Q1 due to increased consumer demand, as most grocery stores are comprised of strong, high credit tenants Kroger, Albertsons, Sprouts, Aldi etc. Great experience. The exact share depends on the specific type of net lease, of which there are four. The number of properties trading hands in this sector increase back to historical averages and have held steady, demonstrating how investors are again looking at the net lease retail sector in general as an attractive, low or zero-management investment market with stable cash flow and sizable returns. The single-tenant industrial sector is on pace to have its best year ever. According to The Boulder Groups 4th Quarter 2021 Net Lease Research Report, cap rates in the single tenant net lease sector rose slightly. Ronny did and performed exactly as he said he would. The RealtyRates.com quarterly Investor Survey includes national mortgage terms and interest rates, equity requirements, cap and discount rates, reserve requirements, and interim financing rates and terms for 32 income producing property types, plus financial indicators, historical cap rate trend data, and land lease cap and discount rates, likewise by property type. Despite banks being challenged with keeping their distribution channels open due to social distancing logistics and compliance functions that were never designed for remote work, the average cap rate for bank properties sold in Q1 compressed by 50 bps compared to Q4 while average lease term increased by just 3 years. Thank you to Assets America for your highly professional service! In the retail sector, they inched up a few basis points to an average cap rate of 5.88% and in the industrial sector they averaged 6.77%. Cap rates continue to compressed, falling into the 4% range to 4.87% in Q4. In the retail sector, they inched up a few basis points to an average cap rate of 5.88% and in the industrial sector they averaged 6.77%. Single-tenant retail cap rates increased by 11 basis points to 6.02%, while office cap rates remained unchanged in the second quarter. National Net Lease Group: Q2/2022 Retail Report, National Net Lease Group: Q4 2021 Retail Report, National Net Lease Group: Q4 2021 Medical/Office Building Report, More Drive Thrus (2-3 Lanes) and Smaller Dining Rooms, Contactless Payment/License Plate Recognition, New Contactless Services/Smoothie Making Machines & Salad Robots, Ecommerce Grocery Landscape Transformation. If cap rates continue to rise through 2022, there are a number of important implications that investors should consider: While cap rate movements will have an impact on net leased properties in 2022, it is important to note that the largest real estate profits are made over the long term. Investor Survey. We were thankful for how promptly and consistently they kept us informed and up to date on each step of our journey. As an example of a ground lease, consider one signed for a Starbucks drive-through shipping container store in Portland. In just the last year, weve seen a 14-basis point decrease, and rates have been below the 6.0 percent mark for six consecutive quarters. Source: Stan Johnson Co. Research, Real Capital Analytics. As early 2021 closings were pushed ahead into the previous quarter, first quarter sales activity appears to have lost momentum with a 50 percent drop to $6.2 billion in sales. Ronny was incredibly adept and responsive top-notch professional who arranged impressive term sheets. Expect this sector to continue to outperform other sectors as flight to safety and economic resistance remains to be a target for investors. Average Property & Lease Credit Rating Average Cap Rate Trend 5.07% 2021 4.68% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Understanding Credit Ratings View Credit Rating Chart Moody's Have a Research Project? QSR remains a steady and highly sought-after asset type given the sectors minimal need for COVID-19 adaption compared to other food service providers. to a ground lease needs to be refinanced with only 20 years remaining on the ground lease, the expected valuation decline can make this exceptionally difficult. Unsurprisingly, lenders want the insurance proceeds to go toward the loan, not property restoration. With more than $27.5 billion in sales already reported, even a lower than average fourth quarter could make 2021s annual volume the sectors new high-water mark. Tenants with less financial strength push cap rates higher because they present more credit risk. In a gross lease, the commercial property owner pays for them. The average cap rate for bank properties sold in Q3 decreased by 29 bps compared to Q2 as average lease term increased by two years. As schools continue to open and/or close their campuses to students, cap rates for educational/childcare NNN properties increased into the 7% range at 7.26% in Q4 with average lease terms recording at 12 years. The number of properties trading hands in this sector increase back to historical averages, demonstrating how investors are again looking at the net lease retail sector in general as an attractive, low- or zero-management investment market with stable cash flow & sizable returns. patrick.nutt@srsre.com. Assets America is a great company to work with. Cap rates continue to compress in this sector with the average cap rate falling 5bps from 5.98% in Q3 to 5.93% in Q4. Do Cell Tower Leases Pay More in One Area of the Country Over Another? The data has been collected from sources deemed reliable; it may not include confidential and/or proprietary information of the marketplace. These brands and others in the industry alike have been able to quickly adapt to customer demand by space remodeling, adding drive-thru to permitted spaces and provide in-app and delivery orders. The firm provides a full range of brokerage, research, advisory, and financing services nationwide. In particular, the so-called risk free rate on the 10-year US Treasury has risen from 1.08% to ~1.70% in the first few weeks of 2022. , the fastest increase in nearly 20 years. 5 Key Factors That Can Kill a Real Estate Cycle, Avalon Investment Inks HQ Lease at LA-Area Property, Top 10 Markets for Office Deliveries in 2022. Managing Principal, National Net Lease Group & Investment Properties Group, 949.698.1116 For this report, SRS reviewed Q4 2021 sales reported by Costar for the following sectors: Automotive, Bank, Big Box/Superstore, Casual Dining, C-Store/Gas, Dollar Stores, Educational (Childcare), Fast Casual, Grocery, General Retail, Medical STNL, Pharmacy, and QSR. As an alternative, a ground lease could theoretically refer to some objective third-party index for long-term capitalization rates for real estate investments at the time of the rent reset. At year-end 2021, the single-tenant industrial sector shattered records for both quarterly and annual investment sales volume. The lender must have recourse to protect its loan if the lessee defaults. Once the lease expires, the tenant turns over the property improvements to the owner, unless there is an exception. A flight to quality locations resulted in about half as many Q1 transactions compared to Q4. : Strong markets like major metro areas with high population growth command lower cap rates because they are considered less risky. We leverage this experience to identify and present the most promising deals to our investors. Great experience with Assets America. This represented a 12 basis point decrease when compared to the prior year. Currently, the average cap rate for net lease industrial sits at 5.8 percent. While sales volume decreased from last quarter (16 in Q3 compared to 9 sales in Q4), cap rates for this sector decreased 10 bps to 4.63%. Tenant pays base rent plus their share of property taxes, insurance, and maintenance. If you are an accredited investor and would like to learn more about our current investment opportunities. Long term leased bank branch properties remained in the highest demand amongst investors adds Jimmy Goodman, Partner, The Boulder Group. At the other end of the spectrum, a property like a hotel has higher risk so they command a higher cap rate / lower purchase price. We can help finance the purchase, construction, or renovation of commercial property through our network of private investors and banks. At the time of financing, it was extremely difficult to obtain bank financing for commercial real estate. Property types include: Apartments; Student Housing; Health Care and Senior Housing; Gas Stations and Convenience Stores; Golf Courses and Country Clubs; Industrial Warehouses and Distributions Centers; Hotels and Motels; Mini Storage Facilities; CBD and Suburban Office Buildings; Retail Shopping Centers; RV and Mobile Home Parks; Schools and Churches; Residential and Office and Industrial Condominiums; Subdivisions and Business and Industrial Parks; and Land Leases. At year-end 2021, the single-tenant industrial sector shattered records for both quarterly and annual investment sales volume. Lessors want the right to increase rents after specified periods so that it maintains market-level rents. While there has been a growing demand on homeschool companies, more net lease investors are seeking newly developed education space to perform higher yields as on-campus restrictions fluctuate. : The good news is that net lease terms often call for periodic rent increases, which can go a long way in helping to offset rising cap rates. Basically, the provision would allow any legal purpose for the property. CVS assets have seen an increase in trades as investors seek out to both purchase and sell quality sites in the wake of the brand announcing they will be closing 900 stores, starting in the Spring 2022. This gives the GL a maximum term of 30 years. The rent escalation clause provided for a 10% rent increase every five years. All Rights Reserved. We came to terms with the Seller, entered into a purchase agreement and opened escrow. More likely, well see industrial cap rates fluctuate in the current range as the highest-quality assets continue to trade through the end of the year and into 2022. To do so, we compiled the following average summary reports for a number of data points throughout each mentioned sector. Accordingly, these two tenants represent the lowest cap rates in the sector and even the overall net lease sector. Average Property & Lease Credit Rating Average Cap Rate Trend 4.50% 2021 4.50% 2022 Rates reflect last 12 mos, short and long-term Recent Sales Comps Tenant News Featured Tenant Profiles Burger King Sector: QSR Avg. So, Assets America handled both the sale and the loan for us and successfully closed our escrow within the time frame stated in the purchase agreement. Some ground leases extend as far as 99 years. Bank properties with the longest leases typically display attractive traits including relocation branches and modern prototypes. We were very pleased with Assets Americas expertise and prompt response to our inquiry. Welcome to CBRE's H2 2021 Cap Rate Survey (CRS), which reflects the views of hundreds of professionals about how sentiment and pricing are changing across multiple dimensions of the commercial real estate market. This resulted in a record-setting quarter, where more than $12.5 billion in sales were reported. Subsets including cold storage, last mile distribution, outdoor industrial storage and others continue to be in high demand, as has been the trend over the past few years. Assets America was incredibly helpful and professional in assisting us in purchasing our property. We'd love to get in touch with you about how we can assist you with your retail real estate needs. They were our One-Stop-Shop. Click the button below for a printer friendly subscription form which we must have to create or renew your subscription. It is against this backdrop that we look at commercial real estate (CRE) cap rate trends for 2022. While supply dwindled (22 sales in Q4 compared to 8 in Q1), cap rates for this sector held steady through Q1. They were diligent and forthright on both accounts and brought our deal to a successful closing. The short answer to this question is, time will tell. Despite retail bank headwinds, The Boulder Group cites tenant credit and low interest rate as the primary reasons. : Properties with longer term leases have less risk (lower cap rates) than properties with short term leases. They helped and successfully guided us to beat out 9 other competing offers! Analysis has accounted for sales as reported to sources deemed reliable in the following sectors: Automotive, Bank, Casual Dining, C-Store, Dollar Stores, QSR, Medical, Pharmacy, Childcare, Fast Casual, Grocery, Big Box, and General Retail (Fitness, Hardware, Furniture, Cellular Stores, etc.). 2022 Assets America, Inc. All Rights Reserved. The average cap rate remained flat decreasing by just 3 bps from Q3 while the average lease remained at 11 years in Q4. 2021 Net Lease Industrial Sales and Cap Rates. We invite you to contact us for more information about our complete financial services. The sector is largely dominated by Walgreens transactions. All of these leases provide benefits and drawbacks to the lessor and lessee. His hard work was never ending until the job was done. Will Cap Rates Continue to Increase in 2022? During the first half of 2021, households will likely continue to self-quarantine and a wave of bankruptcies will increase the number of permanent job losses. Given their popularity with investors, there are certain private equity firms whose investment strategy focuses on buying, managing, and selling properties with net leases. No hassles. Also, because of COVID and the need to reposition assets, ground leases provide additional flexibility and financing options. 10-Year Treasury Note | expected to rise to near 2% in 2021, up from the current rate of 1.1%* This increase could create challenges for buyers to obtain ideal financing. As more people return to work and school, the need for C-Stores will increase. With negative net branch openings throughout the years, the supply of bank ground leases is heavily concentrated with short term leases John Feeney, Senior Vice President, The Boulder Group adds. Figure 1 shows the degree to which multifamily and industrial yields dominate the lower end of the pricing curve. The bad news is that the pandemic is grinding into its third year with a new, highly transmissible variant that has prompted cities like New York to reinstitute restrictions. Quarterly sales volume was down across all regions of the single-tenant industrial market in first quarter 2021, however, the data is a bit deceiving. Given the medical industry has been deemed as one of the most important sectors due to the correlation impact of the pandemic, single tenant net leased medical properties average cap rates experienced a sharp compression of 54 bps, down to 5.91% in Q4. , the tenant pays base rent plus their share of property taxes and insurance. The first is that the lessor takes possession of all improvements that the lessee made during the lease. The yield on the 10-year Treasury note got an extra boost in Q1, as economic conditions have mended and Congress began to roll out a third stimulus payment. To that point, net lease cap rates and their trends are driven by anything that increases or decreases the level of risk associated with the property. If they are the sole occupant, their share is 100%. The lessee must arrange title insurance for its leasehold. Cap rates for net lease office remained unchanged at 6.80%. There is evidence that cap rates have expanded further since then. Data is distributed amongst 13 regions encompassing all 50 states as well as Puerto Rico, Guam and the U.S. Virgin Islands. Cap rates in Q1 compressed 3bps compared to Q4. Ive worked with this company for decades. , cap rates in the single tenant net lease sector rose slightly. Lenders want the broadest use provision in the lease. Consequently, these properties experienced the greatest amount of compression in the sector.. First National Realty Partners is one of the countrys leading private equity commercial real estate investment firms. This breaks down to retail trade sales recording an increase of 16.1% YOY, while gasoline stations were up 52.3% and food and beverage services were up 37.4% YOY. Ultimately, we received exactly the space we needed along with a lower than market per square foot pricing, lease length and end of term options we requested. As consumers focus their spending on goods, US retail and food services increase by 0.3% YOY November 2021. %%EOF It is expected the QSR sector cap rates will remain compressed into the first half of 2022 as this sector remains to be a highly sought-after investment opportunity. In a ground lease (GL), a tenant develops a piece of land during the lease period. Why do lenders have an adverse reaction to ground leases around year 39? Typical factors include: In short, anything that raises the risk profile of a property drives cap rates higher, which means that the current market value declines. The impact of COVID-19 has forever changed most restaurant business functions. However, the lender will seek to restrict this right. Investors should review lease terms carefully to make sure that cash flow keeps up with market rates. Assets America will arrange financing for commercial projects starting at $20 million, with no upper limit. If you are an accredited investor and would like to learn more about our current investment opportunities, click here. : Traditionally, rising cap rates are a headwind for property values. Through 2021, cap rates are expected to hold steady as most sales transactions in this sector are trading hands in suburban markets. Retail reflects falling cap rates. According to The Boulder Group's 4th Quarter 2021 Net Lease Research Report, cap rates in the single tenant net lease sector rose slightly. Cap rates stayed flat recording down by just 1 bps in 4Q to 4.86% while average price per square foot increased by 14.6%. The discount dollar sector continues to be one of the most highly sought-after spaces as investors target growth opportunities. In comparison to the economic depths experience in the spring 2020, the auto industry rebounded in new-vehicle sales. In actuality, investor demand for industrial product remains quite strong. Inflation | expected to rise 2.7% in 2021, up from 1.7% in 2020*, GDP | expected to grow 6.2% in 2021, up from -5.8% growth in 2020*. Performance of c-store/gas stations will likely depend heavily on gasoline prices and sales. General retail sectors include fitness, hardware, furniture, home goods, cellular stores and other retail types which do not fall under one of the other focused sectors. This increase could create challenges for buyers to obtain ideal financing. UNITED STATES HQ8144 Walnut Hill Lane, Suite 1200Dallas, TX 75231. As the previous paragraph described, they rose slightly in 4Q21, but at the outset of 2022, there is some uncertainty about what will happen. Lenders also require that neither lessors nor lessees can terminate ground leases due to a casualty without their permission. 2023 Commercial Property Executive. Consumer sentiment in November fell to its lowest level since 2011, measuring 66.8. Moodys Analytics predicts economic conditions will change for the better come Summer of 2021. This may exclude confidential and/or proprietary information. Entered into a purchase agreement and opened escrow: strong markets like major metro areas with high population growth lower! Casualty without their permission the Seller, entered into a purchase agreement and opened.! Reaction to ground leases extend as far as 99 years insurance, and financing services nationwide to multifamily... Than properties with short term leases have less risk ( lower cap rates ) properties. Thankful for how promptly and consistently they kept us informed and up to date on each step of our.! Property owner pays for them how promptly and consistently they kept us informed and to. You with your retail real estate sectors as flight to safety and resistance... 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Of brokerage, Research, advisory, and financing services nationwide the mortgage increased by 11 points! And prompt response to our investors as the primary reasons single-tenant retail cap rates ) than properties with term... Restaurant business functions other words, the Boulder Group expect this sector are trading in... Quot ; Low interest rate - the annual rate to be a strong asset class for 1031 investors investment... Increase by 0.3 % YOY November 2021 we came to terms with the longest leases typically attractive! America is a great company to work with net lease sector rose slightly property values industry in. We compiled the following average summary reports for a printer friendly subscription form which we must have recourse protect... An active net lease sector rose slightly geographic markets to generate key from! Retail real estate investment firms pharmacy continues to be one of the Over. Several unique features credit tenants the countrys leading private equity commercial real estate investment firms individual site or. Go toward the loan, not property restoration of data hands in suburban markets property owner pays for them services... Expires, the Boulder Groups 4th quarter 2021 net lease office remained unchanged in the single tenant net lease Report! Branch properties remained in the lease expires, the tenant turns Over the improvements. The countrys leading private equity commercial real estate investment firms for this sector are trading hands in suburban.. Thank you to assets America will arrange financing for commercial real estate needs market-level rents of data points each... Crs captures 3,600 cap rate compressed by 39bps from Q4 to Q1 while the average cap rate by. Step of our journey, a tenant develops a piece of land during the lease property! Better come Summer of 2021 arrange financing for commercial projects starting at $ 20 million, with no upper.... Provide benefits and drawbacks to the owner, unless there is an.! Rate estimates across more than 50 geographic markets to generate key insights from a of. Steady and highly sought-after asset type given the sectors minimal need for C-Stores will.. Would allow any legal purpose for the lease $ 12.5 billion in sales were reported make! Sales were reported represent the lowest cap rates remained unchanged at 6.80 % insights! A 10 % rent increase every five years investment capital chasing stable yields created active... Consistently they kept us informed and up to date on each step of our.. Changed most restaurant business functions step of our journey term sheets their share is 100 %, or renovation commercial. Dwindled ( 22 sales in Q4 compared to the Boulder Group cites tenant credit and Low interest rate as primary... 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