Another New High in Triple Net Lease Inventories

Triple net lease inventories have been on the rise since at lest May 2022, according to the calculations of Chris Lomuto at Northmarq. They rose even higher in October, hitting 5,883, with 1,407 posted last month, “eclipsing the 2023 monthly average by around 48%,” he wrote. “In fact, October saw the biggest inflow of new inventory since I started tracking this 18 months ago. Unsurprisingly, NNN inventory reached another new high in October, making it the fourth new high in five months.”

The additions compared to 1,088 listings removed. The ongoing increase in inventory isn’t a good sign. Any healthy market needs inventory for transactions. When the inventory amounts keep rising, it shows a potential imbalance in buyers and sellers. The increases of inventory increase supply without equivalent demand, meaning that prices should fall.

There was also a 25% increase in price reduction emails during October, he said. That blew past the previous high in September, and then, to date, November’s number has increased slightly over that.

In CRE, depending on the health of the net operating income, the result can be instead an increasing gap between sellers bids and buyers asks, because sellers might be able to hold on and wait for better pricing. Buyers then find something else to do with their cash. Although the 10-year Treasury yield dropped as of Monday, November 27 to 4.39%, that still could be an attractive no-risk to satisfy discouraged buyers.

Lomuto called “a familiar story this year” the combination of “robust inventory, waning search activity.”

“You don’t need a PhD in economics to understand the implications,” he added.

At the same time, there is some discontinuity with cap rates, which have continued to hover around 6% for the last five months. Lomuto took that to mean that sellers understood the current situation.

“Add to that backwards-looking comps, with an inherent survivorship bias (the lucky sellers still booking relatively low closing cap rates, the unlucky ones not appearing in the closing comps at all), and you can understand why sellers would want to test the market at some cap rate that is defenable based on comps, assess the feedback, and reprice accordingly. It’s the rational thing to do.”

As he reminds, it is important to remember that transaction counts only reflect what the firm captures in its own data, so think of the results as trends rather than as absolute counts of what the market is doing.