Single-Tenant Net Lease Cap Rates Rise Again

(Illustration courtesy of The Boulder Group)

Cap rates in the single-tenant net lease sector increased for the tenth consecutive time in the third quarter, according to The Boulder Group, Wilmette, Ill.

Single-tenant cap rates increased three basis points to 6.50% for retail properties, eight basis points to 7.75% for office assets and five basis points to 7.15% for industrial buildings, Boulder said in its third-quarter Net Lease Research Report.

“The persistent upward trend in cap rates can be primarily attributed to sustained high interest rates,” Boulder Group President Randy Blankstein said. “Additionally, there is a stagnant supply of net lease properties on the market resulting from limited transaction activity from both private and institutional buyers.”

The supply of properties in the single tenant sector also rose in the third quarter, increasing by 6% compared to the previous quarter. Boulder expects the supply of net lease properties to grow as tenant expansion plans continue and sellers add supply to the market. “As developers begin to construct properties at higher yield on cost, the expectation is that cap rates will continue to expand aside from the most sought after properties, tenants and markets,” the report said.

Boulder Group Partner Jimmy Goodman noted the market continues to favor buyers as supply and demand dynamics play out, allowing investors to be more selective and demand higher yields.

The report said the recent federal funds rate cut will likely spur transactions. “Lower borrowing costs may encourage some buyers who have been sitting on the sidelines to re-enter the market, increasing buyer demand,” Boulder said. “Investors will continue to monitor the Federal Reserve’s monetary policy and its impact on the capital markets. The potential for further rate cuts in 2024 could gradually improve the transaction velocity and pricing in the net landscape near the mid-point of 2025.”