The largest quarterly change in average sold cap rates for net-lease properties during Q3 occurred among Jack in the Box, Jiffy Lube, Caliber Collision, Starbucks, and National Tire and Battery (NTB), according to a recent report released by a representative of Stan Johnson Company. The firm reports that national cap rates rose 70 basis points (bps) for Jack in the Box and 40 bps for Jiffy Lube, while dropping 30 bps for both Caliber and Starbucks and 50 bps for NTB.
SoCal Real Estate spoke with Stan Johnson senior director Ronnie Givargis, who is based in Irvine, California, about the report, where he sees retail net lease cap rates heading over the next several years, and the advice he would give investors in these properties, particularly in the SoCal market.
SoCal Real Estate: What are the most interesting retail net lease cap rate trends found in your firm’s Q3 2018 Cap Rate Trends report?
Givargis: There was one primary trend that jumped out at me. Despite recent upward movement in average cap rates across the entire net lease retail sector, it’s clear that high-quality properties with long lease terms are still seeing cap rates compress in many of our highlighted tenant sectors. In fact, the automotive, grocery, and retail banking sectors were the only ones that saw average cap rates increase quarter to quarter. Pricing for premium properties will be an important trend to watch in the coming quarters as retail cap rates, as an overall market trend, are expected to continue their upward movement.
How do you see retail net lease cap rates changing over the next several years?
I see cap rates for quality tenants and quality locations remaining steady, with only minimal upward movement in the coming years. As an overall market trend, however, lesser-quality tenants and locations should push overall cap rates noticeably higher, as investors chase the upward trending interest rates that borrowers are being offered from lenders.
Which factors are most influential on these cap rates?
A great location is paramount, although supply and demand, quality of the tenants, and rent-to-sales ratios play important roles in these cap rates as well.
What advice would you give to retail net lease investors, particularly in the SoCal market, based on the report?
Based on the low cap rates in the SoCal market and minimal inventory of quality properties for sale, I might suggest that SoCal investors consider following some of their most trusted tenants out of their primary investment market to other cities and states. There are a lot of tenants actively expanding, and opportunities outside the local market could be fruitful.