Single Tenant Cap Rates Just Keep Climbing

The single-tenant net lease market continued its upward trajectory in Q4 when cap rates rose for the 11th consecutive month. 

However, despite the persistent climb in cap rates, there’s also growing investor interest, particularly as bid-ask spreads start to narrow, per GlobeSt.

By The Numbers

The net lease market saw notable increases in cap rates across three key asset sectors: retail, office, and industrial.

• Retail cap rates rose 2 bps, reaching 6.52%.
• Office cap rates rose 3 bps to 7.78%.
• Industrial cap rates shot up 8 bps, reaching 7.23%. 

Overall, the national single tenant cap rate rose to 6.76%, a modest 3 bps gain from the previous quarter.

This upward movement is largely attributed to persistent high interest rates, which have dampened enthusiasm. Additionally, the Federal Reserve’s recent decision to cut interest rates by just 25 bps in December left many investors cautious.

Sector-Specific

While the retail and office sectors saw fewer properties on the market in Q4 compared to Q3, the industrial sector bucked the trend, with available assets up by 7.6%. Higher industrial availability suggests a more favorable market as the demand for warehouse and logistics space remains strong.

One retail subsector, drug stores, saw significant volatility. Companies like Rite Aid (RADCQ), CVS (CVS), and Walgreens (WBA) have been feeling the eat, which has driven up cap rates for net lease drug store properties by 23 bps. 

Walgreens saw its national asking cap rate rise by 25 bps, while CVS’s cap rate went up by 15 bps. The upheaval in this sector, fueled by Walgreens’ potential privatization and CVS’ strategic adjustments, has led to a surge in supply and a shift in sentiment.

Other retail sectors showed more modest changes in cap rates. The casual dining sector saw its cap rate slip by 6 bps from Q3. Conversely, the dollar store and corporate quick service restaurant sectors saw slight increases, up by 8 bps and 4 bps respectively.

Narrowing Spreads

One of the more optimistic signs in the report was the narrowing of the bid-ask spread. The gap between asking and closing cap rates shrank or remained flat across many segments. This suggests market participants are more willing to meet halfway, which could help boost deal volumes.

According to the report, if transaction volume picks up, this could lead to a more balanced market and help alleviate the pressure caused by the current backlog of net leased assets. This, in turn, could help create a more liquid market, as investors gain confidence in the long-term outlook.

Investor Outlook

Looking ahead, the report suggests investor activity may increase if short-term interest rates continue to decline. As capital markets adjust to these changes, investors could be enticed back into longer-term assets, including net lease properties. 

Experts believe that if borrowing costs fall further, more capital will flow into the net lease sector, helping support deal volumes.

In Summary

As investors adapt to the new interest rate environment, the market may see a resurgence in deal activity, creating opportunities for both buyers and sellers.

The single-tenant net lease market remains one of the most active CRE sectors, with investors closely monitoring interest rate movements and their potential impact on asset values. The narrowing bid-ask spreads and increased investor interest in industrial signal a more active market ahead. ial hardship, leading to more losses for investors and lenders.

As lenders lose patience and properties face the real consequences of overvaluations, it’s clear that the office sector’s future will depend on more accurate, transparent valuations.