Net Lease Cap Rates Expand For Fifth Consecutive Quarter

(Image courtesy of The Boulder Group)

Single-tenant net lease cap rates increased for the fifth consecutive time in the second quarter, the Boulder Group reported.

Cap rates increased to 6.40%, a 13 basis point increase compared to the first quarter, Boulder said in its Second Quarter Net Lease Research Report. Looking at individual sectors, cap rates increased 12 basis points to 6.17% for retail, 27 basis points to 7.27% for office and 3 basis points to 6.80% for industrial properties.

“The rise in interest rates combined with available investment returns in other fixed-income investment opportunities continue to be the primary drivers for the upward pressure on cap rates” Boulder Group President Randy Blankstein said. He noted transaction volume for the first half of 2023 significantly lagged prior years’ pace.

Boulder said the supply of properties in the market is increasing as properties sit on the market longer. New properties added to the market in the second quarter were approximately 20% less than in the first quarter.

“In recent years cap rate compression allowed property owners to sell properties at higher values than their original acquisition price despite a shorter lease term,” said Boulder Group Partner Jimmy Goodman. “This strategy no longer holds true in a scalable form in the current cap rate environment, causing many owners to hold their assets rather than consider a sale.”

The report noted capital markets continue to put upward pressure on cap rates in the net lease markets. “Investors will be carefully monitoring the upcoming Federal Reserve meetings as the primary sentiment is that multiple rate increases will occur prior to year-end,” Boulder said. “Within the private capital buyer pool, all-cash or low leverage investors will focus on higher quality assets with a strong preference for income tax free states. While the depth of the 1031 buyer pool remains shallow, institutional investors will take advantage of larger scale transactions or one-off transaction within their acquisition cap rate targets.”