Single-Tenant Net-Lease Still Positioned for Performance

If one area of commercial real estate has remained steadiest, it’s single-tenant net-lease properties, claims Marcus & Millichap.

As of March, the number of major U.S. markets with sub-4 percent single-tenant vacancy matched the count from the same period five years ago, with national vacancy down 10 basis points during that stretch, they wrote. The firm points to the continued strength of the labor market and says that has supported increases in retail spending beyond inflation for real growth. Real increases in wages have also contributed by giving people on average more money to spend after price inflation.

There’s been a new benchmark for quarterly core retail sales set during the first three months of 2024, they said. It’s not that inflation isn’t causing households to prioritize necessities and tighten their budgets — people are. But they are “also reserving more of their incomes for eating out and experiences, a dynamic that is aiding foot traffic and patronage at net-leased retail spaces. Should these trends continue amid a pullback in construction and historically low vacancy, it will reinforce positive leasing activity and prompt retailers to execute expansion initiatives.”

Outside of the drugstore segment, which has been under attack by multiple other retail segments challenging its ability to maintain broader product mixes, each “major single-tenant category … recorded little or no vacancy adjustment over the past year ending in March, with the fast food, convenience store, and restaurant sectors all entering the second quarter with sub-3 percent rates.”

Primary, secondary, and tertiary market vacancies stand respectively at 4.6%, 4.3%, and 3.5%. “This general tightness will aid owners when executing lease renewals or attempting to secure new tenants,” Marcus & Millichap wrote. A quarter of all primary CRE deal flow in the trailing 12-month period ending in March 2024.

Most closings ran between $1 million to $10 million, a lower deal range that in various recent studies held up better than larger ones, according to GlobeSt.com reporting. Financing is easier to find and the absolute differences in pricing gaps between buyers and sellers are on a smaller scale than in larger deals.

“For single-tenant borrowers, local and regional banks will remain primary financing resources; however, the sector’s strong fundamentals may support a more diverse lending platform,” they wrote. “Among the 50 major U.S. retail markets, 34 entered April with a single-tenant vacancy rate at least 100 basis points below their long-term mean — a list that is heavily populated by Midwest, South, and Texas metros.”