Net Lease Cap Rates Continue Upward Trend
With interest rate cuts likely ahead, The Boulder Group forecasts increased transaction volume this year.
Cap rates for the single-tenant net lease sector have hit a seventh consecutive quarter of increases, according to The Boulder Group’s fourth quarter report for 2023. Overall, cap rates rose to an average of 6.58 percent, up 7 basis points from the third quarter of 2023, at 6.51 percent.
When looking at the individual sectors for single-tenant net leases, the retail side rose 8 basis points to 6.35 percent, while the industrial sector saw an uptick of 4 basis points to 7 percent. The office sector saw the greatest increase in cap rates, up 14 basis points to 7.55 percent.
Similarly, The Boulder Group’s report showed that the number of properties on the market in the fourth quarter of last year grew by 11.6 percent overall. For this statistic, the retail sector took the hardest hit compared to industrial and office, rising 12.7 percent when compared to the previous quarter. According to the report, the spread between the median asking price and closed cap rate also increased across all asset types.
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Randy Blankstein, president of The Boulder Group, said in prepared remarks that the cap rates increasing once again is due to the asset pricing not catching up to the massive increase in borrowing costs over the past year. Blankstein also said in prepared remarks that the lack of 1031 buyers is causing property supply to increase.
Much like in previous quarterly reports, drug stores and dollar stores are struggling and are experiencing an increased supply of properties on the market. According to The Boulder Group, these two sectors faced bloating supply and tenant issues at the corporate level, which have translated into more severe cap rate increases than the overall retail sector.
Walgreens, which saw its cap rate increase 15 basis points in the fourth quarter, was downgraded from investment grade to “junk” bond status by Moody’s. Its decline was first noted in another third quarter 2023 report from Northmarq. Family Dollar also saw a cap rate increase of 25 basis points, which could lead to a financial review from its parent company, Dollar Tree.
A potential upswing later this year
While the past several quarters have seen cap rate increases for the single tenant net lease sector, The Boulder Group is expecting the Federal Reserve to cut interest rates this year. The Federal Reserve has indicated potential interest rate cuts for 2024, but the market is still waiting for two upcoming meetings in January and March to glean some outlook for the rest of the year.
With interest rates expected to decline, The Boulder Group’s report noted that a stabilized or decreasing rate environment should spur more dealmaking for the rest of the year. However, the report also noted that cap rates wouldn’t return back to the peak levels for the single tenant net lease sector seen in previous years.
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