Single-Tenant Net Lease Sector Cap Rates Rise for 11th Quarter

(Illustration courtesy of Boulder Group)

Cap rates increased for the 11th consecutive quarter within all three sectors of single-tenant net lease properties in late 2024, per The Boulder Group, Wilmette, Ill.

Single-tenant cap rates increased to 6.52% (+2 basis points) for retail, 7.78% (+3 basis points) for office and 7.23% (+8 basis points) for industrial assets.

“Sustained high interest rates and commentary from the Federal Reserve following the December meeting continues to negatively impact the market,” Boulder Group President Randy Blankstein said. He noted overall cap rates rose to 6.76%, representing a three basis point increase from the previous quarter.

While transaction velocity in 2024 remains significantly below 2021’s peak, the fourth quarter experienced an uptick in investor activity, the report said. The spread between asking and closed cap rates remained flat or decreased for net lease properties.

Boulder Group Partner Jimmy Goodman said the change in bid-ask spread compression indicates a gradual alignment between buyer and seller expectations, something not experienced in early 2024.

“The majority of retail sub-sectors remained relatively consistent on a cap rate level. However, the drug store sector continues to experience immense upward pressure on cap rates,” Boulder Group Senior Vice President John Feeney added.

Last year the drug store sector experienced the emergence of Rite Aid from bankruptcy, CVS exploring “strategic options” and the potential of Walgreens being taken private by private equity and store closures. As a result, the net lease drug store sector experienced a 23 basis point increase in the fourth quarter and an 8.5% increase in supply, the report said.

“The net lease market continues to adjust to the higher rate interest rate environment experienced over the past year,” Boulder Group said. “Investors will be carefully monitoring the capital markets, especially following the commentary from the December Federal Reserve meeting. If short-term rates continue to decline, the expectation is for investors to get off the sidelines and into longer term duration assets including net lease.”