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Credit Tenants Drive Falling Cap Rates

By Globe St. Friday, April 24, 2015

Net Lease Properties: Evidence of a Shift in Quality

It is no secret cap rates for net lease properties, and investment real estate in general, have compressed dramatically in the last few years. This trend is especially pronounced for properties with investment grade tenants and long lease terms which are trading at all time low cap rates.

With voracious demand, however, comes the question of supply. The inventory for high quality net lease properties is falling. While development is picking up, it has yet to have a notable impact on supply. Moreover, properties with shorter lease terms, and overall lower quality, are now being brought to the market to exploit the low cap rate environment.

This trend has a two implications. First, it means going forward buyers focusing exclusively on high quality net lease properties will have to pay a larger premium. Second, it means those searching for yield must shift their focus to riskier assets. Nonetheless, the market is changing and buyer and sellers alike need to adjust their strategies to maximize returns.

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