Triple Net Lease Sees the Most Listing Activity in Almost a Year

Middle market net lease investment sales have a reason to hope that transactions will start to pick up: Listings are the highest since October in 2022 at 5,564 properties, according to a Northmarq report by Chris Lomuto. That included 1,070 listings added, versus 900 removed. That was about a 3% increase and three out of the last four months saw new inventory highs.

But the jump in inventory isn’t surprising because “asking caps seem to have hit a ceiling,” according to the report. Caps were up about 75 basis points and have been roughly stuck at about 6% for the last four months, which is about where they stood at the end of 2020. “Ironically, that is still pricier than they were pre-pandemic.” 

The average closing cap was “up by 87 bps relative to peak pricing last summer,” Lomuto wrote. “To be fair, that number may evolve as more of the data rolls in for August and September, but 87 bps would mark a reversion back to the mean, of around 6.2 bps per month.” According to the data, closing caps look as though they might continue their ascent absent a sudden change in market activity as the last time they were this high was in April 2021. In January 2021, closing caps were at close to 6.7%.

Transaction counts were at about 300, a figure comparable to February of this year and the lowest since at least the opening of 2021.

While absolute returns in triple-net lease have increased, “they’ve actually fallen relative to the competitive landscape.” The gaps between NNN returns and the S&P 500 yield, 10-year Treasurys, and the federal funds rate have significantly compressed. A complete spread that was once a full 600 basis points is roughly a third of that, giving investors choices that offer better risk-adjusted returns.

With more inventory and better choices, price reduction emails, at least ones that Lomuto has seen, have skyrocketed. September brought 403 and he estimated that October would end at 465. As he wrote, “I’m getting 5-7 years worth of price reduction emails every month now.”

This leads to a pressing question of whether the current market is sustainable or resting on 1031 exchanges and sunsetting bonus depreciation. “Considering both the 1031 and bonus depreciation rules are legislative in nature, I think these are important questions to be thinking about as we approach elections.”