Single Tenant Net Lease Cap Rates Ticked Up Again In Q3

For the first time in the last two years, cap rates increased for the single tenant net lease sector for two consecutive quarters, according to new data from The Boulder Group.

The increases were observed across all three asset classes in Q3, with single tenant cap rates rising to 5.86% (+6 bps) for retail, 6.80% (+3 bps) for office and 6.61% (+1 bps) for industrial. At the same time, the supply of net lease properties went down by more than 12% over the prior quarter.

“Buyers and sellers have yet to agree on pricing levels given the current environment and a period of price discovery continues,” the report notes. “The spread between asking cap rates and confirmed sale cap rates increased slightly in the third quarter, but not in a meaningful amount. Accordingly, sale transactions in the third quarter of 2022 were more than 30% lower than in the third quarter of 2021. The expectation from market participants is that the bid ask spread will widen as price discovery plays out in the fourth quarter and into 2023.”

The pricing analysis reflects similar research from JLL recently, which observed “real-time pricing discovery” underway leading into the second half of the year.

“Investors are ‘stress-testing’ based on future rate increases and the potential for a recession,” the JLL report noted. Debt markets are also volatile and posting upward pricing pressure across assets.

Net lease buyers also changed their acquisition criteria as rates rose and inflation heated up over the quarter, according to The Boulder Group, with properties with rent growth or the ability to increase rents in the near term in highest demand. Meanwhile, demand for properties with limited or no rental escalations are limited to properties with above market yields or strong underlying real estate.