Regional Net Lease Cap Rates Differ

A recent report by Boulder Group shows that net lease cap rates vary by region, and experts explain that those rates are determined by the large cities those …

A recent report by Boulder Group shows that net lease cap rates vary by region, and experts explain that those rates are determined by the large cities those regions contain. This is how they explain higher rates in the Midwest and lower rates in the West, and the difference naturally influences where domestic and international investors shop for their next deal. Investors are said to be moving money out of the West due to the spread in cap rates, but experts believe that wide margin, currently at 2%, should close and even out investment opportunities. For more on this continue reading the following article from National Real Estate Investor.

Cap rates on net lease assets among the country’s regions are now seeing a spread of almost 2 percent, with the West bottoming out and rates highest in the Midwest. That difference does drive some investors in more competitive markets to look elsewhere for opportunities with higher yields, but some observers say that effect can often be overstated.

Regions’ cap rates are driven mainly by the major cities they contain, which lower overall rates for the West and Northeast. Cap rates are at 6.33 percent in the Western U.S. and 7.32 percent in the Northeast, according to an analysis provided by the Boulder Group.

In addition, most international investors focus on the biggest cities, says Randy Blankstein, president of the Chicago-based Boulder. This year, 8 percent of net-lease properties over $2.5 million that have sold were bought by cross-border investors.

Mountain states (7.59 percent) and the South (7.66 percent) enjoy lower cap rates than the Midwest (8.04 percent) due to higher growth rates. While in some cases their higher cap rates may entice buyers from other states, that impact may not amount to much.

The theme of California investors in particular looking outside their state for deals “is probably more myth than reality,” Blankstein says. California has more investors just because it has more people, to begin with, which partially explains its influence.

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And “the premium California buyers pay is almost always for California properties,” Blankstein says. “They believe in their growth trend the most. A lot of that money stays at home, in general.”

This was borne out by a recent study performed by the net-lease firm Calkain Cos., which reviewed the ownership of all 669 single tenant net lease CVS and Walgreens properties in Florida. Calkain found that Florida owners held 53 percent of the sites. New York was in second place at 8.22 percent, and California came in third, at 6.57 percent.

Real estate brokers are spreading rumors to sellers of the primacy of California investors, the Calkain report said. “[I]t’s an absolute fallacy to think that just because someone says they are able to secure California buyers would mean that they are the ultimate purchaser for any one asset,” the report said. “. . . These numbers clearly demonstrate that the ‘California money’ pitch is completely unfounded.”

“We have continually heard that there is this large influx from outside states inundating properties” in Florida, says Calkain Executive Vice President David Sobelman. “Since we’re here in the market, we felt that it was a little bit far-fetched.”

Even with lower out-of-state interest than rumored, Florida has been experiencing strong growth in net lease. The state is tax-free, and it’s familiar to an aging demographic, with some older investors owning second homes there, Blankstein says. People also become familiar with Florida by vacationing there or sending kids to Florida colleges, Sobelman says.

The net lease firm has offices in Tampa and Fort Lauderdale and has had a busy summer in the state, Sobelman says. Within a 45-day period, it sold four portfolios comprising 40 properties—Circle K, Applebee’s, Krystal Restaurant, and Fred’s Super Dollar—with an aggregate sale price of $63 million.

Texas has also enjoyed an active net lease market thanks to low unemployment, a high growth rate, and, like Florida, no taxes. Cities across the state have attracted buyers from both coasts, says Brad Kam, principal at Net Realty Advisors in Dallas.

“Previously, you could get a lot higher return in Texas,” Kam says. “But right now cap rates are not necessarily significantly higher, because of the markets. There’s limited product.”

Calkain’s Sobelman has been working on a report similar to his firm’s Florida survey but focusing on Texas. Nearly 50 percent of Texas’s net-lease owners who were surveyed were in-state, but California accounted for a higher share of ownership than in Florida, with about 15 percent of properties.

The current spread in cap rates between the West and Midwest should narrow soon, says Blankstein of the Boulder Group. At almost 2 percent, it’s too wide, and cap rates on the West Coast “don’t make a lot of sense,” he says.

“You can go anywhere else in the country and pick up 100 basis points or more,” Blankstein says. “That’s a good opportunity to move money out of the West and capture a higher yield elsewhere.”

This article was republished with permission from National Real Estate Investor.


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