A Mild Net Lease Cap Increase Is Worse Than It Looks

The Boulder Group released its 2024 Q1 review of the net lease market. “Cap rates in the single tenant net lease sector increased for the eighth consecutive quarter within all three sectors in the first quarter of 2024,” the report said. “Single tenant cap rates increased to 6.42% (+7 bps) for retail, 7.60% (+5 bps) for office and 7.02% (+2 bps) for industrial.”

The amounts weren’t large, but the ongoing string of upward increases is significant, Boulder Group President Randy Blankstein tells GlobeSt.com.

“What was surprising in Q1 was starting with a lot of optimism,” he says. “A lot of properties were brought to market in January.” Many had adjusted pricing because sellers assumed that as the year went on, interest rate cuts would “magically appear,” so they could be patient.

But the cuts haven’t come and may not for a while. The expected transactions didn’t happen. Properties are continuing to pile up “and we’re still early in April with a very low volume of 1031 exchanges,” Blankstein adds. “That’s kind of reset the market. The case of cap rates to stabilize or go down has gotten smaller. They are likely to continue growing in the second quarter. Without more than one rate cut, it’s likely that cap rates will go up the remainder of the year. Even if we got a rate cut, it would take three to six months to work through the system.”

Buyers can afford to be choosy. Last year, there was a 45% to 60% overall drop in transactions, Blankstein says. “This year it’s down another 10% over that,” he adds. “There’s a lot of wait and see in this market. Buyers believe pricing will get better so there’s no hurry to invest capital at this stage. Sellers are considering, ‘Am I a long-term holder or do I want to sell into a non-deep market?’ so there’s a little bit of a standoff.”

Blankstein expects more activity in the second half of 2024 out of seller necessity. “There is a high amount of loan maturities coming in, on lower loans to value, on different valuations than they’re accustomed to. We think selling is more likely than bringing in more maturity.”

More properties on the market will mean more competition and probably further drops in prices.

The only sector still showing a significant number of transaction completions being done is in lower-cost deals, like $2.5 million on a cash basis. These are typically things like Starbucks, Dollar General, Family Dollar, and Burger King.

Because there’s a good amount of supply on the market, buyer reaction is a flight to quality. Premiums between best and worst have narrowed slightly. People are also choosing to invest in the largest metros.

“This is a time people aren’t as concerned about the yield, but about quality and what might happen in a recession,” says Blankstein.

Net Lease Spring:

Held April 16-17 in NYC, Net Lease Spring will bring together hundreds of dealmakers from the nation’s top firms. This year’s program will feature 5.5 hours of face-to-face networking and over 5 hours of content focused on micro and macro trends for 2024, being resilient through market volatility, how to serve your corporate tenant clients and much more! Learn more or register here.