Net Lease Cap Rates Continue to Expand

Cap rates in the single tenant net lease sector increased for the third consecutive quarter in the fourth quarter of 2022, according to new research from The Boulder Group.  Single tenant cap rates increased to 5.95%, an increase of 9 bps, for retail, 6.95% (+15 bps) for office and 6.65% (+4 bps) for industrial in the quarter.

“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%.”

Analysts say the market supply of net lease assets ticked up in the fourth quarter as deal flow slowed and properties remained on the market for longer periods of time. Cap rates for retail, office and industrial were all near historic lows in the first quarter of 2022, but rose for retail and office throughout the year as borrowing costs increased. 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 by just 5 basis points, according to The Boulder Group.

The supply of net leased properties ticked up by more than 10% in the fourth quarter as well. Recently constructed properties leased to Dollar General saw cap rates expand by 40 basis points over the past quarter, while other increases of note 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,” Boulder Group analysts say in a report detailing their Q4 findings. “The Federal Reserve’s monetary policy will continue to impact the market and net lease investors will carefully monitor its future meetings.”