The Price Held Because the Buyer Changed

The 10-year Treasury closed the second quarter at 4.44 percent and the third at 5.29 percent, per the Treasury's daily yield curve data. That is 85 basis points. Over the same quarter, The Boulder Group's report released October 9 has retail net lease asking cap rates up nine basis points, to 6.69 percent.

Our position: the price held because the buyer changed. Per Boulder, leveraged buyers have turned far more selective, while cash buyers who pay for long leases and strong credit are still bidding. If you are building a pad to sell into net lease, build the deal that buyer wants. The reset is landing on the deals that need debt to close.

What the report says

Boulder's release says permanent financing is now "generally priced above net lease cap rates." Borrowing costs more than the property yields. That puts pressure, in Boulder's words, on "leveraged investors and larger price point assets that rely more heavily on financing."

A Boulder partner put the split plainly in the release: "Private capital and family offices are paying up for long-term credit, while leveraged investors are being far more selective about short-term product." Boulder also credits the permanent restoration of 100 percent bonus depreciation for supporting private buyer demand.

Two other numbers fit the same story. Retail net lease supply fell 3.7 percent in the quarter, to 4,289 properties, while office and industrial supply rose. And the retail bid-ask spread widened three basis points, to 25. The firm also said sellers "who accept where the market is today are closing transactions," and the wider spread "shows how many have not caught up yet."

Our reading: fewer retail listings and a wider spread mean some sellers are holding out for June prices. Asking cap rates are what sellers ask. They are slow to show a reset that buyers are already pricing.

Term is the product

CRE Daily's October 7 breakdown of the same Boulder data shows how much the remaining lease term matters. Corporate QSR properties with 20 or more years left asked a median 5.00 percent. Those with fewer than 10 years asked 6.85 percent. Franchisee properties ran from 6.00 to 7.55 percent across the same bands.

On a hypothetical $100,000 of rent, 5.00 percent is $2.0 million and 6.85 percent is about $1.46 million. Same rent, different term, about $540,000 apart.

Last week we wrote that we would watch the premium ground lease ask in this report. Per CRE Daily, Chick-fil-A and McDonald's ground leases asked 4.50 percent, up five basis points from the second quarter. With the 10-year above 5 percent, we read that as a buyer paying for credit and term, not for yield over Treasuries. By the test we set last week, the premium for the best paper is real.

What we would do with it

• Long term first. A pad built to sell should carry the longest primary term the tenant will sign. Term is what the cash buyer is paying for.
• Size the check for cash. Boulder names larger price points as the deals most exposed to debt. A single pad is often a check a private buyer can write without a loan.
• Read asking caps as a ceiling on price. Where listings are thinning, the survey lags the bids. We would underwrite exits a step wider than the asking number.
• Watch the Southeast fundamentals, not just the rate. Marcus & Millichap's third-quarter Charlotte report puts single-tenant vacancy at 2.7 percent, among the tightest in the country. We think tight occupancy is part of why owners can afford to wait.

Boulder says the market expects another rate increase before year-end and that higher yields may change how much trades in the fourth quarter. We will be watching two things in the next report: whether retail listings come back at higher cap rates, and whether the 20-year band holds near 5 percent. If the listings return wider, that is the reset arriving in the asking numbers.