What's Behind the Uncertainty in Single-Tenant Net Lease

The single-tenant net lease (STNL) retail sector experienced significant fluctuations in the first half of 2024, driven by a host of economic factors, including elevated borrowing costs. A new report from Colliers, a global commercial real estate service firm, found a 25% decline in STNL sales volume and a rise in median cap rates to 6.5%. 

Colliers’ Anjee Solanki and Nicole Larson noted that this trend, coupled with declining transaction volumes, suggests a cooling market as investors become more cautious and pricing adjusts to the shifting financial landscape.

Key factors influencing STNL fluctuations

Colliers found several factors behind the fluctuations in the first half.  Among them, Solanki highlighted elevated borrowing costs, rising cap rates and softening property values for their impact on the STNL sector. 

“The increasing median cap rate reflects higher investor yields as buyers seek to avoid negative leverage in a more cautious market environment,” said Solanki, Colliers’ national director of Retail Services & Practice Groups. In comparison, 2021’s transaction volumes and cap rates were stable at around 5.5% to 5.8%, followed by increased volatility in 2022. By mid-2024, cap rates had risen sharply to over 6.6%, reflecting higher perceived market risks and economic uncertainty.

Despite strong retail demand, high occupancy rates and stable economic conditions, property values have softened, with Colliers reporting that the median price per square foot decreasing to $220. However, Larson said that investors have not completely backed off, with private capital becoming the dominant investor, joining institutional and cross-border investors have added to their portfolios. REITs, meanwhile, have reduced their holdings.

“The favorable investment climate, supported by moderate inflation, steady economic growth, and a robust labor market, continues to attract investment despite these challenges,” said Larson, Colliers’ manager of National Retail Research.

Economy, Federal Reserve impact STNL environment

Colliers’ research found that the current economy is creating a mixed environment for the STNL sector. Though the Federal Reserve’s gradual interest rate cuts in 2024 and beyond are likely to ease borrowing costs and boost investment, raised inflation forecasts and slight increases in unemployment could temper confidence, according to Larson. 

However, Solanki sees that a resilient labor market, stable hiring, and stronger-than-expected consumer spending (particularly among middle- and high-income households) will continue to support retail demand. 

Additionally, some segments of the market are responding better than others. Colliers research found that the auto parts category has performed exceptionally well in 2024, driven by a combination of limited new auto inventory, soaring vehicle prices and the growing DIY economy. As a result, auto parts stores have seen nearly a 3% increase in visits and have significantly expanded their footprint, leasing 5% of all retail space.

Market stability will improve outlook, investor confidence

Despite the decline in STNL sales volume, Colliers expects that investors are ready to re-enter the market at the first sign of stability. And as it stabilizes, the gap between buyer and seller expectations will likely narrow, which could also lead to increased transaction volume as soon as late 2024.

“Overall, while some economic uncertainty remains, the outlook for the STNL industry is positive, with rate cuts and robust consumer spending likely to provide a supportive environment,” said Solanki.