For the eleventh consecutive month, the single tenant net lease sector is seeing cap rates continue to climb, according to The Boulder Group’s net lease market report for Q4 2024. Nevertheless, it described hopeful signs of increased investor activity.
The spike in cap rates affected three sectors: retail, office and industrial. Single tenant cap rates increased to 6.52% (+2bps) for retail, 7.78% (+3 bps) for office, and 7.23% (+8 bps) for industrial. Overall, cap rates rose to 6.76% -- three basis points higher than in the previous quarter. The report said the market continues to be negatively affected by high interest rates, as well as comments from the Federal Reserve following its December 2024 meeting, when it cut interest rates by just 25 basis points.
There were fewer retail and office properties on the market in the fourth quarter than in the third. However, the number of industrial assets available rose 7.6% from 525 to 565.
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Even though the number of deals was well below the levels of 2021, the report noted an uptick in investor activity in 4Q 2024.
“The spread between asking and closed cap rates remained flat or decreased for net lease properties. The bid-ask spread compression indicates a gradual alignment between buyer and seller expectations. If transaction velocity continues, the supply backlog of net leased assets will decrease,” the report stated.
While most retail sectors have not seen significant fluctuations in cap rates, it said this is not the case for drug stores, which continue “to experience immense upward pressure on cap rates.” Events like Rite Aid emerging from bankruptcy, CVS exploring strategic options, and the possibility that Walgreens may be taken private helped spur a 23 basis point increase in the net lease drug store sector in 4Q 2024, along with an 8.5% increase in supply.
The national net lease asking cap rate for Walgreens was up by 25 basis points between the third and fourth quarters, while CVS' was up by 15 basis points.
The national asking cap rate for the net lease casual dining sector as a whole fell six basis points from the third to the fourth quarters. It rose eight basis points for the dollar store sector as a whole, four basis points for the corporate quick service restaurant sector, and fell 3 basis points for net lease franchisee national asking cap rates.
As the net lease market continues to adjust to higher rates, the report said investors will be keeping a close eye on the capital markets. “If short-term rates continue to decline, the expectation is for investors to get off the sidelines and into longer-term duration assets including net lease,” it predicted.
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