In the third quarter of 2023, for the 10th consecutive quarter, cap rates for single-tenant net lease properties increased quarter-over-quarter in retail, office, and industrial. The amounts were small: 3 basis points in retail (6.47% to 6.50%), 8 basis points for office (7.76% to 7.75%), and 5 basis points for industrial (7.10% to 7.15%), according to data from The Boulder Group.
The blended cap rate increase was 3 basis points (6.70% to 6.73%). It shows that the biggest influence on average cap rates came from retail.
The primary reason for the long-standing increase in cap rates, according to Boulder, is sustained high interest rates. Additionally, a shortage of transactions over time — also driven by interest rates — has contributed to excess inventory.
As GlobeSt.com reported early in September, many former multifamily owners who saw large capital gains with the runup of multifamily property prices and sales during the pandemic. They needed to put the money into other investments as a tax strategy. The 1031 buyers moving out of multifamily and into net lease drove prices above where previous investors could rationalize putting in more money.
Boulder says that many net lease investors hope the 50-basis-point rate cut by the Federal Reserve will boost transaction activity and improve cap rates in their favor. The firm says that “most market participants remain cautious.” They do point out that lower rates might encourage some buyers to reenter the market.
However, as sources have continued to tell GlobeSt.com over time, at best the half percentage rate decrease is a psychological boost. Experienced investors said that the amount wasn’t nearly enough to justify buying new properties.
Waiting for even lower rates might take longer than markets are assuming. Fed Chair Jerome Powell recently said that “if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.”
Boulder provided data for some specific single-tenant net lease sectors. Auto saw a quarter-over-quarter cap rate increase in Q3 of 5 basis points, from 6.35% to 6.40%. Break it down further and auto parts saw an 8-basis-point increase; auto service, 4 basis points; and collision, 5 basis points.
Casual dining saw a 3-basis-point increase from 6.65% to 6.68%. But that varied wildly by specific brand. Olive Garden saw a 3-point decrease in cap rates, but Applebee’s was up by 15 basis points.
QSR overall increased cap rates by 2 points. Chick-fil-A (ground lease) was flat. Panera Bread was up by 10 and Starbucks by 8.
The drugstore sector was on the whole up by 17. Rite Aid stayed flat. CVS saw a 10-point increase and Walgreens, a 25-basis-point jump.
The dollar store sectors faced a 5-point increase but also saw big variance by company. Dollar General was up by 5 while Family Dollar jumped by 20.