Net Lease Economic Report


RESTON, VA – June 8, 2012 – (RealEstateRama) — Earlier this year, locally-based Calkain Cos., and New York-based Chandan Economics announced a new mission: they would partner to provide research in one of the few areas of commercial real estate.

Hipp: “Given where Treasuries are headed, people are looking for yield.”

That day is here. The two firms are getting set to release their first report and have given an exclusive sneak preview. The report covers trends in the macro economy with an eye on how these impact the net lease space.

It has found that the fit-and-start nature of the recovery has reinforced the appeal of net lease assets especially those with long term, high quality tenants. In addition, the sector is grappling by a lack of supply. The result of these multiple trends, not surprisingly, is that cap rates are low and getting lower. Namely, net lease cap rates declined by five basis points to just over 7.2% in the first quarter on average.

These rates, of course, fluctuate based on geography and tenant type. California and the Northeast, for example, claim the lowest cap rates.

The report also notes there is stronger investor demand for bank branches, pharmacies, and the best-performing fast food chains. Bank branches registered average cap rates of 6.1% in Q1, for example–100 basis points lower than the 7.1% average cap rate for pharmacies. Investors, however, can be counted on to show a high degree of sophistication in their acquisitions not only across classes of tenants but specific tenants, as well. Sam Chandan, president and chief economist of Chandan Economics, tells “Some pharmacy and bank branches are trading at sharply lower cap rates than their peers, even after controlling for variation in property quality and time to lease maturity.” For these most coveted assets, he says, debt yields are lower, as well, meaning that lenders perceive many of the same differences as relates to credit risk.

The most aggressive cap rates Jonathan Hipp, CEO of Calkain, says he has seen has been in the mid 4s for “McDonald’s-type credit.” Expect compression to continue, he tells “Given where Treasuries are headed, people are looking for yield. Also, there is so much buyer interest in this product now we have gotten to the point where we almost don’t need new buyers. What we would like to have is more products.”

Not that the demand-supply imbalance will give investors pause, Hipp adds. “With everything going on, from the uncertain employment picture to the European debt crisis, at end of day people are still cautious on the economy. With the right combination of credit, location and length of lease it is a great time to be a seller in the net lease market.”

Or even a buyer, he says—but with a caveat. In this environment, current buyers should beware that an eventual exit strategy could happen in a period of higher interest rates and a diminishing flight to quality.

About Calkain
We are a national commercial real estate firm that provides consulting and brokerage services to both private and institutional clientele with an expertise on triple net lease investments.


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