Single-Tenant Supply Sees a Big Jump in Q3
A significant portion of which has been on them market for more than a year.
The single-tenant net lease (STNL) market has seen a “remarkable quarter-over-quarter surge in supply,” says a new report from investment brokerage firm B+E. But that’s far from all good news.
“In Q2 of 2023, there were 3,286 properties listed on the market,” they wrote. “By Q3, this number increased significantly to 3,905 properties, representing an increase of almost 19% quarter-over-quarter.”
The third quarter saw an additional 1,236 properties brought to market — 31.7% of the current supply. But the influx isn’t necessarily good news. The new stock is racing in at double the rate as older stock is going off the market, and 15.3% of the current supply has been on the market for more than a year.
Of those long-term marketed properties, 43.7% have cap rates below 5.5%. Compare that to the properties on-market for less than a year, where 27.0% have a cap rate below 5.5%. “Few properties are penciling at a 5.50% cap or lower, indicating challenges in finalizing transactions due to rising interest rates,” they wrote.
The threshold also suggests an ongoing bid-ask gap between buyers and sellers that will take some time to work through without a significant increase in transactions to provide price discovery.
The biggest portion of the surge in retail was a 144% increase in big-box properties. “A prominent contributor to this surge is Tractor Supply, which introduced 20 new properties to the market, with an average cap rate increase of 43 bps from the previous quarter,” they wrote. “Tractor Supply’s second quarter earnings call announced changes to its real estate strategy, including accelerating new store growth, which has likely played a significant role in the increased supply of properties on the market.”
Distribution facility supply also saw a jump of 19% between Q2 and Q3. B+E sees that as resulting from the growing use of sale-leaseback within industrial. In that arena, cap rates were up 38 basis points, suggesting greater uncertainty about transactions. “The increase in cap rates reflects heightened awareness of the arrangement’s stability, particularly as tenants, grappling with financial constraints, choose SLB transactions as a means to generate additional cash,” they wrote.