Single-Tenant Net Lease Cap Rates Continue to Rise

While 2023 was not kind to net lease, things have been improving so far in 2024, particularly for single-tenant.

A new report from the Boulder Group says that in the second quarter of 2024, single-tenant net lease saw cap rates increase for the ninth consecutive quarter. That was for all three sectors, with retail hitting 6.47% (up five basis points), office up 7.67% (an increase of seven basis points), and industrial at 7.10% (eight basis points up).

Things have been improving since the middle of Q2. In May, Marcus & Millichap said single-tenant net lease was in good shape. They pointed 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 also helped by giving people on average more money to spend after price inflation.

The Boulder Group also noted that property supply had increased by 8.7% over the first quarter. Q2 also saw the largest number of properties on the market since 2021 Q4. For retail, the amount of inventory increased quarter over quarter by 8.1%. Office was up 11.4% and industrial, 9.5%.

Investors have shifted their positions. They largely think that the market currently favors buyers, which would fit with the ongoing increases in cap rates. That is particularly true for commoditized properties. Buyers have little competition and, as a result, are largely focused on either tax-free states or regions with strong demographic drivers. They’re also looking for CRE fundamentals and tenants with good credits. Stronger brands — Olive Garden and Texas Roadhouse, Boulder gave as examples — haven’t seen increases in cap rates.

Breaking results down even further, the auto sector has seen a five-point increase in cap rate. Median asking cap rates vary by lease term remaining. So, an auto service location with 16 to 20 years left has a 5.50% cap rate, but a 7.15% one for five years or less.

Casual dining saw an eight-basis point increase in general. But the rates varied from 5.25% for a Texas Roadhouse ground lease to 7.25% for either a Buffalo Wild Wings or an iHOP. Median asking cap rates ran from 6.05% for 16 to 20 years left on the lease to 7.30% for five years or less.

Dollar stores ran from 6.75% for Dollar General to 7.80% for Family Dollar. Net lease drug stores have seen some tough times for Walmart, Ride Aid, and Walgreens. The overall sector saw asking cap rates of 6.67%. But even if particular locations are threatened, the quality of the real estate that drug stores have accumulated is good, meaning owners should be in good shape, even if a store pulled out, as there will be plenty of other opportunities.