Net Lease Investment Sales Plunge 63% in Q1

For the fifth consecutive quarter, demand for single-tenant net lease property slowed in the first quarter of 2023, with just $9.68 billion in sales. That total was down 42.2% from the prior quarter and down 62.6% compared to Q1 2022, according to Northmarq’s Q1 2023 Market Snapshot report.

Experts had anticipated the slump because of rising interest rates and changing economic conditions. It followed a period of strong sales activity, especially toward the end of 2021.

“Buyers and sellers continue to struggle finding alignment with pricing net lease assets, as higher debt costs translate to reduced buying power for some investors,” Northmarq stated.

The result has been that some buyers and sellers have come up with work-around solutions when feasible. This includes turning to all-cash transactions, 1031 exchanges, and sale-leaseback arrangements. There has also been a return of foreign capital to the market, especially for single-tenant and retail assets.

The report found that cap rates rose across all three primary commercial property sectors: industrial, office, and retail. Single-tenant industrial cap rates reached an average of 5.5% — the highest in 18 months, following an 11-basis-point jump in Q1 2023. Office cap rates rose six basis points in the quarter. However, there was only a two basis-point increase for retail during the same period.

“Watch for single-tenant cap rates to continue rising throughout 2023,” the report cautioned, “but do not expect significant quarterly spikes in the overall net lease average.”