Net Lease Cap Rates Expand for Third Consecutive Quarter

(Photo courtesy Boulder Group, Wilmette, Ill.)

Single-tenant net lease sector cap rates increased for the third consecutive quarter in late 2022, reported Boulder Group, Wilmette, Ill.

The firm’s fourth quarter Net Lease Research Report said single-tenant cap rates increased to 5.95% (up 9 basis points) for retail, 6.95% (up 15 basis points) for office and 6.65% (up 4 basis points) for industrial assets during the quarter.

“Continued upward pressure mounts on cap rates for net leased properties” said Boulder Group President Randy Blankstein. He noted borrowing costs for both private and institutional investors rose during 2022. The 10-Year Treasury yield started 2022 at 1.53% and ended the year at 3.87%.

Following historically low cap rate levels for all three assets classes in early 2022, the retail and office sectors both saw significant increases throughout the year. Single-tenant retail cap rates rose by 20 basis points while office cap rates expanded by 25 basis points from Q1 to Q4. Industrial cap rates widened less, just 5 basis points.

“The primary reason for increasing cap rates is related to borrowing costs, which impacted pricing in all real estate sectors,” said Jimmy Goodman, Partner with Boulder Group.  

As property pricing and sales were affected, the amount of private 1031 exchange investors dwindled as the year concluded. Furthermore, private and 1031 buyers who are active in the market are using less or no debt given the spread between cap rates and current borrowing costs.

“Market supply of net lease assets increased in the fourth quarter as transaction velocity slowed and properties remained on the market for longer durations,” said John Feeney, Senior Vice President with Boulder Group.

The supply of net leased properties increased by more than 10% during the fourth quarter, the report said.

Transaction volume for the net lease sector will continue to lag the robust transaction levels of 2021 as increased borrowing costs and a decreasing amount of 1031 exchange investors hinders activity. The Federal Reserve’s monetary policy will continue to impact the market and net lease investors will carefully monitor its future meetings.

“It is important to note that despite the challenges facing the sector, net lease transactions are occurring,” Blankstein noted. “Investor demand from 1031 buyers will be primarily concentrated in assets with the strongest perceived attributes, such as top-tier credit, long-term leases and strong markets with demographic growth or advantageous tax policy.”