Single-Tenant Net Lease Cap Rates Continue to Rise

Cap rates on single-tenant net lease properties grew again in the last quarter of 2023, according to The Boulder Group. All three main groups — industrial, office, and retail — saw increases, though far from evenly. They rose eight basis points for to 6.35% for retail, four basis points to 7.00% for industrial, and 14 basis points to 7.55% for office.

“Cap rates continued to rise in the fourth quarter as asset pricing has not caught up to the massive increase in borrowing costs over the past year,” they wrote. “Furthermore, there is a lack of 1031 buyers causing property supply to increase.” The number of overall properties went up from 3,662 to 4,085 between Q3 and Q4, a 11.6% increase. The retail sector went from 2,753 to 3,103, or 12.7%. Industrial, from 382 to 417, or 9.2%. And office, from 527 to 565 or 7.2%.

The asking versus closed cap rate spread increased from 30 to 31 basis points in retail (1 point), 25 to 32 for industrial (7 points), and 55 to 67 for office (12 points). The differences between buyers and sellers went up, a contrast from the contraction that JLL recently said it had found in the market overall.

“Subsectors within the net lease retail category that best illustrate the increased supply trend are the drug store and dollar store sectors,” the firm said. “Both sectors are hindered by bloating supply and tenant issues at the corporate level leading to greater increases in cap rates than the overall retail sector. In the fourth quarter of 2023, Walgreens, was downgraded from investment grade to ‘junk’ bond status by Moody’s.

Currently, there’s a wide range for the drug store sector’s 6.46% in 2023 Q4. CVS has the lowest rate at 6.12%. Walgreens sat at 6.33. Rite Aid came in at 8.80%.

“In the dollar store sector, the Family Dollar banner has weighed on Dollar Tree causing the company to review the Family Dollar portfolio,” Bolder Group wrote. “In the fourth quarter, cap rates for Family Dollar and Walgreens increased by 25 and 15 basis points respectively.” The pressure on Family Dollar is clear in median asking cap rates by lease term remaining. For 9 to 11 years, Dollar General saw 6.85%, Dollar Tree was at 7.00%, and Family Dollar was 7.25%. At the upper end of term left, under 3 years, things were more even with Dollar General and Family Dollar at 8.5% and Dollar Tree at 8.40%.