There's More to Net Lease Than Meets the Eye

Net lease continued to plug along steadily at the end of last year, with 762 deals tracked by Avison Young trading at an average cap rate of 5.65% across all tracked sectors, with an average remaining term of 12 years.  But diving into the nuances of each sector reveals more complex market conditions than meet the eye.

For example, the pharmacy sector saw sales volume decline between Q3 and Q4 2022, with 49 transactions in Q4, down from 69 in Q3. The median cap rate was 5.42%. On the other end of the spectrum, Quick Service Restaurants, or QSRs, had the highest transaction volume of any of the sectors tracked by Avison Young, with 189 transactions in Q4 2022 alone (versus compared to 100 in Q3).  Average cap rates ticked up by about 30 bps, landing at an average of 4.98% — the lowest average of any of the tracked sectors.

“The (QSR) sector also saw a pretty drastic increase on the average term remaining of executed deals, landing at an average of 14.2 years remaining, compared to 12.4 years remaining in Q3 2022 deals,” the report notes. “As new players in the market continue to gain market share, it will be interesting to monitor this sector over the coming quarters.”

The convenience store, or C-store segment also registered an uptick in sales volume, with 71 deals in Q4 versus 48 in Q3. Cap rates have clocked in at 08% for the  sector, about 50 basis points lower than the average for single tenant net lease transactions.

Overall, the average remaining term increasing by almost four years between Q3 and Q4 for all sectors Avison Young tracks, “a sign that while the sector is resilient to economic turbulence, it is not immune and the few extra years on a lease give investors the confidence they need to transact,” analysts say.