Waiting for Lower Triple Net Lease Cap Rates

The latest triple net lease (NNN) market analysis from Chris Lomuto at Northmarq has the stirrings of good news — although, so early on, there are no certain redemptive trends yet.

First, average closing cap rates were lower in January, “although 5 to 10 basis points of monthly volatility either way seems to be roughly typical this cycle,” Lomuto wrote. Still, lower cap rates, if they continue, could mean growing valuations. That wouldn’t just be good for sellers but would start some price discovery that might also mean better lending conditions at some point.

But, as he also wrote, “What we have not seen yet, at least on this side of the V [growing out of the downturn and bottom] are two consecutive months of lower cap rates.” He said that this might be an indicator of an inflection point.

Lomuto also noted that Crexi data showed NNN inventory dropping for a second consecutive month in January. It’s been at least 21 months since seeing two consecutive months of falling inventory and also that long since so much inventory finally sold off.

Both sound good, but then there is no way to easily know what percentage actually sold and what portion might have been taken off the market by owners for the time being. Lomuto said that he asked Crexi, but they said, while they had the data, it was the first time anyone asked. .

The average asking cap is still roughly where it’s been. That might be due to expectations of rate cuts, which at this point don’t look like they’re happen until June at the earliest. There is a portion of the market, including at least one former Fed official, thinking that rates will, or at least should, stay more elevated for now. Some are guessing that there could be a rate hike, even, sometime in the near-term future.

Price reduction emails — only what he gets in emails, so not a nationally representative sample — were 334 in January. That’s up from December 2023’s 276, but far down from much of 2022. It might be a sign or might not be.

Getting steadier views of trends, particularly on the supply side, will take at least another month or two, Lomuto wrote. He said that there seems “cause for cautious optimism,” but there are still mixed messages coming in.

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