Single-Tenant Net Lease Cap Rates Increase For Sixth Consecutive Quarter

(Image courtesy of The Boulder Group)

The Boulder Group, Wilmette, Ill., reported cap rates in the single-tenant net lease sector increased for the sixth consecutive quarter, largely due to higher interest rates.

Across sectors, cap rates increased 11 basis points during the third quarter to 6.51% compared to the prior quarter, The Boulder Group’s third-quarter Net Lease Research Report found.

When broken down into sectors, single-tenant cap rates increased 10 basis points to 6.27% for retail properties, 14 basis points to 7.41% for office and 16 basis points to 6.96% for industrial assets.

“The consistent rise in interest rates continues to be the primary driver for the upward pressure on cap rates” said Boulder Group President Randy Blankstein. “Over the course of the third quarter, the 10-year Treasury peaked at 4.68%, which is almost 100 basis points higher than the lowest level of 3.73% during the same time period.”

The report noted the persistent rise in interest rates further amplified the pricing dislocation in the net lease market between buyers and sellers.

“The gap between buyers and sellers remains consistent and properties are sitting on the market longer” added Jimmy Goodman, Partner with The Boulder Group. “In the third quarter of 2023, the marketing time of net lease properties grew when compared to the prior year by 25% to more than eight months.”

The supply of net lease assets on the market increased by nearly 10% during the quarter. “As the supply of net lease properties increased, the buyer pool for net lease properties decreased,” the report said. “Across all commercial real estate asset classes, sale transactions decreased by more than 50% through the first three quarters. Accordingly, the amount of 1031 exchange buyers in the market remains limited. 1031 exchange buyers historically made up a large segment of the buyers of properties below $10 million.”

With a limited number of 1031 buyers, sellers turned to institutional and REIT buyers, Boulder said. But the report noted the increased cost of capital and limited competition pushed cap rates higher for both REITs and private buyers.

“Traditionally, the fourth quarter of the year represents greater transaction volume than other individual quarters as funds are looking to fill yearly allocations” Boulder Group Senior Vice President John Feeney said. “However, with many institutional and REIT buyers achieving their target allocations early, the expectation is for a slower than normal quarter.”