The Boulder Group announced the release of its 3rd Quarter Net Lease Research Report today. Cap rates in the single tenant net lease sector increased slightly for all three asset classes in the third quarter of 2022. Single tenant cap rates increased to 5.86% (+6 bps) for retail, 6.80% (+3 bps) for office and 6.61% (+1 bps) for industrial
“For the first time in the past two years, cap rates increased for two straight consecutive quarters” says Randy Blankstein, President, The Boulder Group. “As the Federal Reserve continues to increase rates in attempt to curb inflation, debt costs have increasingly put upward pressure on cap rates for buyers of net lease properties.”
As economic pressure mounts, formerly opportunistic sellers removed properties from the market that were attempting to take advantage of the historically low cap rate environment. In the third quarter of 2022, the supply of net lease properties decreased by more than 12% when compared to the prior quarter.
“Net lease buyers and sellers have yet to agree on pricing levels given the current environment and a period of price discovery continues,” adds Jimmy Goodman, Partner, The Boulder Group. “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 rising rate and inflationary environment impacted acquisition criteria for net lease buyers. Investor demand for properties with rent growth or the ability to increase rents in the near term are in the greatest demand.
“Investor demand for properties with rent growth or the ability to increase rents in the near term are in the greatest demand.” John Feeney, Senior Vice President, The Boulder Group adds.
Demand for properties with limited or no rental escalations are limited to properties with above market yields or strong underlying real estate. Investors expected cap rates to widen for non-core net lease deals with short term leases, lesser tenants or secondary markets. This has yet to occur on a wider scale, causing a wait and see approach for many investors. As the quarter came to a close, institutional investors and publicly traded net lease REITs raised the cap rate floors for future acquisitions as their cost of capital increased.
The capital markets will continue to impact the overall net lease market. Investors will be carefully monitoring the Federal Reserve’s monetary policy and its impact on their borrowing costs.
“Year end transaction volume will be impacted by the capital markets and the decrease in activity driven by 1031 exchange investors” according to Blankstein.
To view the full report: https://bouldergroup.com/media/pdf/2022-Q3-Net-Lease-Research-Report.pdf
About The Boulder Group
The Boulder Group is a boutique, Chicago-based investment real estate services firm specializing in transaction and advisory services for single tenant net lease properties. Founded in 1997, the firm has closed over $6 billion of net lease property transactions. The firm provides a full range of brokerage, research, advisory, and financing services nationwide. The level of annual, single-tenant transaction volume consistently ranks the firm in the top 10 companies nationally, according to industry benchmarks determined by CoStar and Real Capital Analytics.
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