Office, Retail Net Lease Cap Rates Reach Highest Level Since 2020

Randy Blankstein, President, The Boulder Group. Image courtesy of The Boulder Group

This past quarter was the fourth consecutive one in which cap rates in the single-tenant net lease sector increased, for retail, office and industrial assets, according to a new report from The Boulder Group.

Average national asking single-tenant cap rates increased to 6.05 percent (up 10 basis points) for retail, 7.00 percent (up 5 basis points) for office and 6.77 percent (up 12 basis points) for industrial in the first quarter.

Cap rates in the first quarter of 2023 represented the highest levels since the third quarter of 2020 for both the single tenant retail and office sectors, Boulder Group President Randy Blankstein said in a prepared statement.

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This came after years of historically low cap rates for all three asset classes, and the primary culprit, the report says, is the rise in financing costs. For most net lease assets, this has now created greater negative leverage situations than have been typical in recent years.

Deal volume drops significantly

Transaction volume for the net lease sector in 2022 fell more than 25 percent from the previous year.

In addition, the overall supply of net lease properties decreased by more than 6 percent from the fourth quarter, which The Boulder Group attributes to less-motivated sellers taking their properties off the market.

On the other hand, sellers with a higher level of motivation (for example, those facing debt maturity or a backfilled development pipeline) “will continue to move pricing to attract buyers that can offer high certainty of execution.”

Even the best-performing assets

As an example of investors’ desire for resilient tenants with long-term leases, the report notes that newly completed properties with recession-resistant tenants such as 7-Eleven and McDonald’s “represent some of the lowest cap rates in the sector.”

Nonetheless, The Boulder Group remarks, even these tenants aren’t immune to upward pressure on cap rates. In the first quarter, cap rates for new-construction 7-Eleven and McDonald’s locations increased by 35 and 15 basis points, respectively.