Wednesday, March 4, 2009
Cap rates should naturally float above where financing rates are. This is especially true in small single tenant retail properties - let's call them the Burger Kings as an example of a NNN deal. On the West Coast, these deals would sell at about a 6% cap rate and purchase prices in the $1.0M - $1.3M range. Over the last decade, most of these purchases were tied to a 1031 tax deferred exchange of a typical rental house owner trading into an easy-management single tenant property. But what happened to the single family market lately? Those rental homes lost value and that stemmed the flow of people exchanging up into small single tenant deals. With buyers in that market drying up, motivated sellers of the BKs have had to lower their asking prices (increase their cap rates) to attract the fewer buyers. AND interest rates are low. So, the spread between interest rates and natural cap rates is unnaturally high. Good time to be shopping if you have cash (for a down payment) to do a deal.