Net Lease Cap Rates Expand; 2024 Expected to See Increased Transaction Volume
(Illustration courtesy of The Boulder Group)
Overall, cap rates increased to 6.58%, up seven basis point from the prior quarter, Boulder said in its Fourth Quarter Net Lease Research Report.
When broken down into sectors, single-tenant cap rates increased eight basis points to 6.35% for retail, 14 basis points to 7.55% for office and four basis points to 7.00% for industrial properties in Q4 2023.
“Cap rates continued to rise in the fourth quarter as asset pricing has not caught up to the massive increase in borrowing costs over the past year” Boulder Group President Randy Blankstein said. “A lack of 1031 buyers is also causing property supply to increase in a meaningful way.”
Boulder Group Partner Jimmy Goodman noted there is still “considerable discord” between buyers and sellers in the net lease market.
The disparity in the spread between the median asking and closed cap rate increased across all asset types from the previous quarter, the report said. This was especially apparent in the office sector, as the cap rate spread increased 12 basis points during the fourth quarter to 67 basis points. Accordingly, the number of properties on the market in the fourth quarter grew by 11.6% overall and 12.7% for the retail sector when compared to the third quarter.
John Feeney, Senior Vice President with Boulder, noted the subsectors within the net lease retail category that best illustrate the increased supply trend are the drug store and dollar store sectors. “The dollar and drug store sectors are hindered by bloating supply and tenant issues at the corporate level leading to greater increases in cap rates than the overall retail sector,” he said.
The report said drug store Walgreens was downgraded from investment-grade to “junk” bond status by Moody’s in the fourth quarter. In the dollar store sector, the Family Dollar banner has weighed on Dollar Tree, causing the company to review the Family Dollar portfolio. Cap rates for Family Dollar and Walgreens increased by 25 and 15 basis points, respectively, during the fourth quarter.
“The Federal Reserve’s recent indication of interest rate cuts in 2024 will be welcomed by net lease developers and sellers,” the report said. “However, the markets will be carefully monitoring the upcoming Federal Reserve meetings in January and March to provide further insight and clarity on what kind of outlook should be expected later 2024. The expectation is that a stabilized or decreasing rate environment will increase dealmaking in 2024, however not to the peak levels experienced in prior years.”
