The Boulder Group announced the release of its 2nd Quarter Net Lease Research Report today. The report features a new and more comprehensive format with specific net lease sector information. Cap rates in the single tenant net lease sector increased for the fifth consecutive quarter to 6.40%, a 13 basis point increase compared to the prior quarter. When broken down into sectors, single tenant cap rates increased to 6.17% (+12 bps) for retail, 7.27% (+27 bps) for office and 6.80% (+3 bps) for industrial in Q2 2023.
“The rise in interest rates combined with available investment returns in other fixed income investment opportunities continue to be the primary drivers for the upward pressure on cap rates” says Randy Blankstein, President, The Boulder Group. “Accordingly, transaction volume for the first half of 2023 significantly lagged prior years’ pace.”
The supply of properties in the market is increasing as properties sit on the market longer. New properties added to the market in the second quarter of 2023 was significantly lower than the prior quarter. In the second quarter of 2023, approximately 20% less properties were added to the market than the first quarter.
“In recent years cap rate compression allowed property owners to sell properties at higher values than their original acquisition price despite a shorter lease term,” adds Jimmy Goodman, Partner, The Boulder Group. “This strategy no longer holds true in a scalable form in the current cap rate environment, causing many owners to hold their assets rather than consider a sale.”
Certain segments within the net lease market including dollar stores, drug stores and coffee users experienced an oversaturation of certain tenants. This resulted in a more significant rise in cap rates for the respective tenants.
“Tenants with large scale expansion plans continue to increase property supply in the market” John Feeney, Senior Vice President, The Boulder Group adds. “Accordingly, cap rates within the dollar store sector experienced some of the largest rise in cap rates (28 bps) in the net lease industry.”
The capital markets continue to put upward pressure on cap rates in the net lease markets. Investors will be carefully monitoring the upcoming Federal Reserve meetings as the primary sentiment is that multiple rate increases will occur prior to year end. Within the private capital buyer pool, all-cash or low leverage investors will focus on higher quality assets with a strong preference for income tax free states. While the depth of the 1031 buyer pool remains shallow, institutional investors will take advantage of larger scale transactions or one-off transaction within their acquisition cap rate targets.
To view the full report: https://bouldergroup.com/media/pdf/2023-Q2-Net-Lease-Research-Report.pdf