Single Tenant Industrial Net Lease Sales Drop 51.6%

As with other areas of single-tenant net lease (STNL), industrial investment sales have faced significant challenges. According to Northmarq reports, general STNL sales volume in the third quarter were $9.61 billion. That was 9.8% from Q2 and 48.3% off from the previous year.

Of that total, industrial saw $4.47 billion, or 46.5% of the total. But the drop off was 23.5% from the second quarter and 51.6% from the same quarter in 2022. A plurality of sales but higher impact of falling sales.

“Cumulatively, the sector has logged just over $16.2 billion year-to-date, positioning itself to have the slowest year on record in six years or more,” they wrote. “Despite the pull-back in activity, industrial assets remain attractive to both investors and leaders.”

There’s an ongoing growing need for industrial facilities. E-commerce and technology among other industries are pushing the expanding need for distribution efficiency and scale. The sector has grown in response with “new, sophisticated facilities in strategy markets.”

As examples, Northmarq mentioned the $20 billion Intel was investing in new semiconductor fabrication plants in Ohio and Amazon’s 4.1 million square foot distribution center in Los Angeles.

“But smaller developments and transactions are moving the market as well,” they wrote. “Local and regional businesses looking for an infusion of cash continue to explore sale leaseback opportunities, while national and global retailers grow their networks of smaller mission-critical, last-mile distribution facilities.”

Industrial STNL has also seen “the most significant upticks in cap rates this year.” They were up 27 basis points from Q2 and 103 basis points year over year, reaching 6.21% in the third quarter.

“By region, the Southwest and Southeast, with 76 and 66-basis-point increases respectively, have posted the most substantial quarterly movement, whereas the Midwest by comparison remained flat and the Mid-Atlantic region reported a slight decline,” they wrote.

Northmarq took that as a sign of volatility that means misalignment between buyers and sellers. As GlobeSt.com has previously reported, the drop of transactions mean a lack of price discovery. Combined with higher interest rates that have made refinancing more difficult, there is likely an unusually high percentage of sales that happen because they must — like an owner being unable to finance without a significant increase in equity investment but lacking the necessary capital.

The company expects additional cap rate increases going into 2024, “although there’s no guarantee the market will settle quickly into a gradual upward pricing trend.” While there could be “unpredictable or erratic movement across cap rate trends in the near term,” the most recent data from the Federal Reserve suggests that interest rates may have seen their high-water mark.