The Boulder Group announced the release of its 4th Quarter Net Lease Research Report today. Cap rates in the single tenant net lease sector increased for the third consecutive quarter within all three sectors in Q4 2022. Single tenant cap rates increased to 5.95% (+9 bps) for retail, 6.95% (+15 bps) for office and 6.65% (+4 bps) for industrial in Q4 2022.
“Continued upward pressure mounts on cap rates for net leased properties” says Randy Blankstein, President, The Boulder Group. “Borrowing costs for both private and institutional investors continued to rise over the course of 2022. For reference, the 10 Year Treasury Yield ended 2022 at 3.87% after beginning the year at 1.53%.”
Following historically low cap rate levels for all three assets classes in Q1 2022, the retail and office sectors experienced a significant rise throughout 2022. Single tenant retail cap rates rose by 20 basis points while office cap rates expanded by 25 basis points from Q1 to Q4. Industrial cap rates widened to a lesser extent, just 5 basis points.
“The primary reason for increasing cap rates is related to borrowing costs which impacted pricing in all real estate sectors,” adds Jimmy Goodman, Partner, The Boulder Group.
As property pricing and sales across all real estate sectors was impacted, the amount of private 1031 exchange investors dwindled as the year concluded. Furthermore, private and 1031 buyers who are active in the market are using less or no debt given the spread between cap rates and current borrowing costs.
“Market supply of net lease assets increased in Q4 2022 as transaction velocity slowed and properties remained on the market for longer durations” John Feeney, Senior Vice President, The Boulder Group adds.
In Q4 2022, the supply of net leased properties increased by more than 10%. Recently constructed properties leased to Dollar General experienced cap rate expansion of 40 basis points over the past quarter. Other notable increases from Q3 to Q4 for recently constructed properties include 7-Eleven (+25 bps), DaVita Dialysis (+25 bps) and Starbucks (+15 bps).
Transaction volume for the net lease sector will continue to lag the robust transaction levels of 2021 as increased borrowing costs and a decreasing amount of 1031 exchange investors hinders activity. The Federal Reserve’s monetary policy will continue to impact the market and net lease investors will carefully monitor its future meetings.
“It is important to note that despite the challenges facing the sector, net lease transactions are occurring.” according to Blankstein. “Investor demand from 1031 buyers will be primarily concentrated in assets with the strongest perceived attributes (top tier credit, long term leases and strong markets with demographic growth or advantageous tax policy).”
To view the full report: https://bouldergroup.com/media/pdf/2022-Q4-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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