STNL Buyers Aim for 7% Cap Rates as Sellers Flood Market

Single-tenant net lease inventory listings have surged by close to 140% in recent weeks, as sellers rush into the market to try to lock in pricing before a recession sets in, B+E Net Lease reported in a Q4 report issued on the opening day of ICSC 2022.

“It’s a great time to be a buyer. There’s a lot of inventory, so you can do comparison shopping and you can push up pricing to those owners because it’s not the only deal available,” B+E Net Lease CEO Camille Renshaw told GlobeSt.

“[Sellers] are realizing that the party’s over, so they’re running to put their property on the market and thinking that I’m not going to get peak pricing, but I’ll get better pricing than I will next year,” she said.

We spoke to Renshaw at ICSC in New York as the show was wrapping up, after she spent two days discussing deals with REITs and others who are jumping in to grab high-quality assets as investors who have over-raised rush to get the money out.

“Everybody has over-raised. Everybody has so much money that they want to get out,” Renshaw told us. “One of the major net lease REITs was sitting here and he said: who is going to flinch first, buyers or sellers? He’s going to flinch first and continue to pay really low cap rates because he has to get the money out.”

Many REITs who are shopping for STNLs are aiming for deals with a cap rate that starts with a 7, Renshaw said, but she added that institutional and private buyers are aiming for different levels.

“For private buyers, their cost of capital may be different and they may be bringing more cash. Private buyers are in the 6s and institutional buyers are in the 7s,” Renshaw said.

B+E’s Q4 report, which Renshaw described as a real-time measurement including new deals, also reported a shift in the balance of buying power between private buyers relying on leverage and institutional cash buys.

The majority of buyers in H1 2022 (51%) were private levered buyers and 33% were institutional cash buyers. This has now shifted to 35% private buyers and 50% institutional buyers as leveraged players head to the sidelines as rates rise and a downturn looms.

“The institutional folks, they’re programmatic, they periodically need to get the money out. It’s like a shark will die [if it doesn’t keep moving], they have to keep purchasing and then reallocate the money,” Renshaw told us.

B+E tracked 3,905 properties on the market with an average cap rate of 5.32%.

The surge of inventory on the market already is having an impact on how deals are being structured in terms of the assumptions about pricing, Renshaw said.

“One of the assumptions is there are empirical trends between the delta of a cap rate and the debt constant—that we have to have 220 bps between those two—and that’s not true,” she said.

Some major sellers are beginning to flinch, Renshaw told us. A major chain that got into the market at a cap rate of 5 got pushed up to a 6 as a ton of inventory flooded the market.

The drug store chain is about to announce a $150M sale-leaseback with a REIT—a deal involving stores with high-volume sales in good locations—with a cap rate of 6.75 and 5% escalations every year.