Cap Rates Hold Mostly Steady Amid Market Slowdown
The first quarter of 2020 bore witness to an economic and global-health crisis unprecedented in modern history, creating uncertainty across all classes of investments. The net lease sector remains one of the most cyclically durable segments of the commercial real estate market, but it nevertheless felt the impact of the coronavirus pandemic.
Activity slowed dramatically quarter-over-quarter, dropping from 586 deals in Q4 2019 to 416 in Q1 2020. The average cap rate across all sectors did not flinch, and in fact dropped 7 basis points from 6.58% to 6.51% as the average remaining lease term increased from 10.5 years to 11.6 years. This finding suggests that depressed volume is caused not by a lack of investor confidence in the sector, but rather by coronavirus-related obstacles to transacting efficiently. Unavailability of debt, inability to inspect properties and difficulty negotiating in a fully remote work environment are chief among these obstacles.
Although net lease cap rates overall did not move much in Q1, this report will take a closer look at some of the sectors most impacted by the coronavirus and its counter-measures – casual dining and QSR. We will also look at the performance of pharmacies, dollar stores and convenience, which, deemed essential businesses, have experienced the fewest hindrances to their daily operations.