The single-tenant net lease market and the national multi-tenant retail market will continue to enjoy booming growth as a combination of low interest rates and ample availability of capital make the sectors attractive for investors, according to a new analysis.
"Without an increase in rates or a tightening from lenders, this environment will continue to fuel buyer demand," says Lanie Beck, Stan Johnson Company Director of Corporate Research, Marketing & Communications. She notes that investment sales volume for shopping centers is up an "incredible" 211% year-over-year in Q3, and the overall net lease market reported more than $20 billion in activity in the last three months.
Single tenant net lease sales volume hit $20.7 billion, enjoying its sixth strongest quarter on record in Q3, with office clocking in at $7 billion (up 30% from last quarter), industrial hitting $10.7 billion (up 11% from last quarter), and retail posting $3.1 billion (down 31% from last quarter).
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"The market is well on pace to exceed 2020's annual sales totals, even if Q4 activity isn't particularly strong—early predictions put 2021's estimated annual total around $75 billion, which would make it the second strong year in history," Beck says.
The overall single tenant net lease cap rate average fell 8 basis points this quarter to 6.01%.
When it comes to STNL buyers, 39% are private buyers and US-based institutional investors account for 30% of all activity, on par with 2020 numbers. Around 35% of office buyers are US-based institutional investors, while private buyers account for 39% of industrial deals and 70% of retail sales.
Meanwhile, multi-tenant retail sales volume hit $14.3 billion in the third quarter, up 39% from Q23. Sales volume so far this year has already surpassed 2020 totals, and "while it won't be anywhere near a record-breaking year, there appears to be strong and growing momentum across the sector," Beck says. Cap rates have stayed stagnant, though there is wide variation across regions.
REITs and private buyers represent a combined 89% of MTR buyers, and the share of REIT deals has increased significantly, going from 3% in 2018 to 40% of the current buyer pool.
A lack of inventory continues to plague buyers, particularly with multi-tenant retail, which has faced significant issues over the past few years by a lack of new development. And then there's the obvious: supply chain issues are presenting challenges for retailers, and the "Great Resignation" is presenting serious labor challenges for employers of all sizes, despite an 18-month low in unemployment.
Consumer confidence dropped significantly in the February through April 2020 period and "it hasn't improved much since then," according to Beck. However, e-commerce sales as a percentage of total retail sales remain strong and are expected to grow throughout the second half of 2021 as consumers begin holiday shopping early.
In addition, "inflation remains a concern for investors and consumers, with CPI rising 5.4% during the 12 months ending in September 2021, Beck says. "Costs are expected to rise for a number of goods and services, further complicating the impact to retailers."
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