Net Lease Cap Rates Rise for Seventh Consecutive Quarter
Cap rates in the single tenant net lease sector increased for the seventh consecutive quarter within all three sectors in the fourth quarter of 2023 to 6.58%. Single tenant cap rates increased to 6.35% (+8 bps) for retail, 7.55% (+14 bps) for office, and 7.00% (+4 bps) for industrial in the fourth quarter. 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. Furthermore, there is a lack of 1031 buyers causing property supply to increase.
Considerable discord between buyers and sellers in the net lease market exists. The disparity in the spread between the median asking and closed cap rate increased across all asset types from the previous quarter. This was especially apparent in the office sector, as the cap rate spread increased by 12 bps during the fourth quarter to 67 bps. 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.
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Subsectors within the net lease retail category that best illustrate the increased supply trend are the drug store and dollar store sectors. Both 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. In the fourth quarter of 2023, Walgreens, was downgraded from investment grade to “junk” bond status by Moody’s. In the dollar store sector, the Family Dollar banner has weighed on Dollar Tree causing the company to review the Family Dollar portfolio. In the fourth quarter, cap rates for Family Dollar and Walgreens increased by 25 and 15 basis points respectively.
The Federal Reserve’s recent indication of interest rate cuts in 2024 will be welcomed by net lease developers and sellers. 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.
President at Friday Bay, Inc
10 个月The anticipated interest rate cuts may not be enough to cover the delta that will exist between the new rates and the inexpensive money of past years. Couple this with a shrinking money supply the inventory will far exceed the demand resulting in a very competitive market place with even higher CAP rates.
Advancing CRE Finance, Optimizing Bank Risk Management, Leading Healthcare Development | Managing Partner at LakeRock Capital, LLC
10 个月KC, reflecting on our numerous discussions about financing NNN lease transactions at our former Bank, brings back vivid memories. We often encountered a common misconception among lenders who believed every NNN lease transaction was of investment-grade quality. Our debates and discussions around the valuations of these transactions were intense and thought-provoking. It's remarkable how the cap rates for some of these transactions were astoundingly low, almost defying the market norms. Looking at the current trends highlighted in the article, it's evident that cap rates in the single-tenant net lease sector have consistently risen for the seventh consecutive quarter across all sectors. This includes retail, office, and industrial, as of the fourth quarter of 2023. It's important to note that this increase isn't isolated but reflects a broader trend where cap rates for most, if not all, property and transaction types have escalated. Subsectors like the drug store and dollar store sectors in the net lease retail category are prime examples of how increased supply and corporate-level tenant issues have led to greater cap rate hikes than in the overall retail sector.
Partner of Net Lease Advisory firm The Boulder Group
10 个月The proof is in the data not just the basic messages you read....