Single-Tenant Net Lease Sales Still Cramped

Still not through even the first quarter of 2024, sales numbers from the latter half of 2023 offer the best recent trend data on how markets are moving, or not. For single-tenant net lease (STNL) sales, that means constricted, according to Colliers.

“A volatile capital markets backdrop led to restrained volume in single-tenant net lease (STNL) sales, with 2023 posting the weakest figures since 2012, and it’s no wonder why,” they wrote. “The 10-year Treasury peaked around 5% in October, while the [Federal Reserve] didn’t announce its plans to pivot until December, resulting in restricted lending and a pullback in activity.”

The dynamic is one of investors looking for something delivering old-time fixed-income style consistency of strong returns. That was something that had been missing for many years with long-term Fed monetary policy coming out of the Global Financial Crisis and then staying. Friday’s 10-year Treasury yield of 4.22% was far off the 5% pace of last October, but still enough to make investors wonder why they’d bother with risk if they could still get significantly more than 4% without worry about major risk.

So, STNL, while remaining an alternative investment class with cap rates that may still not have hit their maximum, faces challenges.

Sales of industrial, which still may be the strongest property type, hit a level in 2023 Q4 that were the lowest since the third quarter of 2015, largely due to interest rate volatility. “Stable assets with long-term in-place leases have fallen out of favor on a relative basis as investors chase the upside of the industrial asset class,” said Colliers. Buyers prefer mark-to-market opportunities where they can roll existing tenants to significantly higher rental rates. In some instances, investors are willing to take on negative leverage to do so, but not on long-dated leases.” Volume was $9.4 billion in the second half of 2023, median cap rate climbed to 6.0%. The median sales prices were $117 per square foot.

Retail STNL held its position better than overall retail, Colliers said. Volume fell only 30% year over year, which under current conditions is a definite win, to $5.9 billion. Cap rates — 6.3% — were only slightly above the 2015-to-2019 average. Median sales figures were $306 per square foot. “Private capital plays a pivotal role in driving the retail STNL market,” Colliers wrote. “The tax advantages of owning real assets create an appeal that most fixed-income investments lack, primarily tax deferral. Along with cross-border capital, private buyers were net acquirers of property on the year. Institutional and REIT sources were net sellers.”

Investors, as might be expected, don’t have a favorable eye for office. Volume was $3.9 billion, median cap rate was 6.6%, and the median price was $283 per square foot. “Buyers remain interested in credit tenants, with recent STNL deals including sale-leaseback transactions for tech companies, life sciences, and healthcare,” Colliers wrote. “Healthcare and medical office continue to become more prominent themes in STNL deals. Medical office transactions, as a share of office STNL deals from 2015–2019 averaged 15.9%. However, in 2023, they drove 31.8% of volume.”

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