Cap Rates Compress Under Heavy Demand for NNN Leased Investments

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Triple Net leased retail properties such as restaurants, drug stores, dollar stores, auto part stores and banks, remain one of the healthier sectors of commercial real estate due to continued strong demand by private investors seeking 1031 exchanges, and by various funds.  Investment sales volumes increased in 2010 over 2009, compressing cap rates 50-100 basis points, particularly for Class A product.  Causes of this boost in demand included the impending expiration of the Bush-era tax cuts that would have increased the capital gains tax rate, stiff competition among various funds hunting scarce Class A properties, low yields in most competing sectors, and a growing attraction toward the long-term stability and low management of these investments.  Bank ground leases and drugstores top the demand list, with a preference for primary markets followed by a desire for strong credit properties in secondary markets.  Fifteen year leases still command a small premium, but ten year leases have become the norm.

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