2024 Net Lease Industrial Sales and Cap Rates

Source: Northmarq, Real Capital Analytics

The single-tenant industrial sector has recorded nine consecutive quarters of declining investment sales volume, and with just over $4 billion logged for first quarter 2024, this is the sector’s slowest reporting period in eight years. So, is industrial falling out of favor with investors? Likely not.

Despite activity falling 11% quarter-to-quarter and nearly 34% year-over-year, many investors remain bullish on the sector given its mission-critical nature for retailers, manufacturers, and more. Today’s interest rate environment combined with other economic and political influences are naturally contributing to slower investment volume. However, vacancy remains low which is helping to buoy rents, and demand from tenants remains healthy, even if some maintain a cautious outlook. One challenge the sector faces in the coming years will be new supply. Construction pipelines are drying up, and with fewer groundbreakings, more tenants and investors will find themselves competing for the limited assets that do become available for lease or sale.

In recent weeks, there have been several notable announcements regarding growth across the single-tenant industrial sector. Amazon announced expanding their same-day delivery services, with plans to reach 100 hubs – nearly doubling the current amount. Dairy producer, Fairlife, broke ground on a $650 million milk processing plant in New York, which is set to be operational by late 2025, and KYOCERA began construction on a new electronics manufacturing property in Pennsylvania.

These and other developments – including central Ohio’s Honda/LG battery plant that should deliver later this year, the TSMC’s chip plant in Phoenix, and Savannah’s EV manufacturing plant by Hyundai – are just some of the projects currently underway that illustrate today’s demand for industrial facilities. However, owner-occupied assets won’t help to satisfy investor demand, and new build-to-suit single-tenant projects may be the only solution for expanding tenants if vacancy and levels of speculative development remain slow.

—Posted on May 30, 2024

Source: Northmarq, Real Capital Analytics

No sector of the single-tenant net lease market has been immune to recent slowdowns in sales activity, including industrial. With approximately $4.5 billion in sales reported for third quarter 2023, volume is down 23.5 percent from last quarter and more than 51 percent from this time last year. Cumulatively, the sector has logged just over $16.2 billion year-to-date, positioning itself to have the slowest year on record in six years or more.

Despite the pull-back in activity, industrial assets remain attractive to both investors and lenders. E-commerce and technology, among other industries, continue to drive warehouse growth and distribution efficiency, resulting in the development of new, sophisticated facilities in strategic markets across the U.S. Enormous investments are being made to support manufacturing and logistics, including Intel’s $20 billion mega-site in central Ohio and Amazon’s multi-story, 4.1-million-square-foot facility in Los Angeles, California. But smaller developments and transactions are moving the market as well. Local and regional businesses looking for an infusion of cash continue to explore sale leaseback opportunities, while national and global retailers grow their networks of smaller mission-critical, last-mile distribution facilities.

Lanie Beck is the Senior Director of Content & Marketing Research at Northmarq. She is responsible for leading the content strategy for the firm and producing research reports in support of the organization’s commercial investment sales division. Beck joined Northmarq in 2022 following the acquisition of Stan Johnson Company, where she had led corporate research, marketing and communications efforts since 2013.

—Posted on Dec. 18, 2023

Source: Northmarq, Real Capital Analytics

The single-tenant industrial market, like the rest of the net lease industry, has witnessed a substantial reduction in activity levels in recent months. With just $5.5 billion in sales reported during second quarter 2023, volume is down 49 percent year-over-year and has dropped 76.6 percent from the sector’s record high in late 2021. Still, industrial remains the strongest performing commercial asset class, and net lease investors are eager to acquire well-located real estate given this sector’s critical nature.

The market continues to see a mixture of portfolio and single-asset transactions although deal count is certainly down from past years. Through the first half of 2023, warehouse and distribution buildings – especially mega facilities nearing 1.0 million square feet – continue to be among the highest priced assets to trade hands. However, there is investor appetite for smaller transactions and facilities as well. The fast-growing industrial outdoor storage niche, for example, has contributed to activity levels in recent months, while smaller flex, manufacturing, and warehouse buildings are being acquired at a fast clip. Highly specialized facilities for food processing and cold storage are helping to drive price per square foot averages higher, as the last five quarters have seen industrial prices consistently average $140 per square foot or more for the first time in history.

Single-tenant industrial cap rates jumped a shocking 46 basis points during second quarter 2023, ending mid-year at 5.95 percent, or equal with the overall net lease average. This tremendous quarterly increase caused rates to surpass the net lease retail average, unseating the industrial sector as the lowest across the net lease market for the first time since early 2020. In the coming quarters, it’s possible rates could fluctuate somewhat, giving back some of this quarter’s gains. Such a steep hike over a single reporting period may not be an accurate predictor of cap rate movement in the immediate future, although an upward trend is to be expected.

—Posted on Aug. 31, 2023

Source: Northmarq, Real Capital Analytics

The single-tenant net lease industrial market, which has been red hot in recent years, was not immune to first quarter 2023’s slowdown. With quarterly transaction volume falling more than 46 percent, the sector posted just $4.7 billion to begin the year, making it the slowest quarter reported by the net lease industrial sector since mid-year 2017. This reduced investment activity does not automatically translate to a decrease in investor interest, however. Single-tenant industrial assets are still extremely popular given their critical role in today’s economy. Rising interest rates have temporarily sidelined some investors, but we have seen all-cash buyers become more opportunistic, which helped buoy first quarter’s meager activity levels.

The supply-demand imbalance that has plagued eager investors for several years may be easing somewhat. Post-pandemic construction levels have been robust as more manufacturing returns to the U.S. and retailers need continued e-commerce fulfillment support. A handful of markets across the nation are seeing increased warehouse development in response to low vacancies, rising rents and other strong market fundamentals, however, some are predicting the market will see reductions in new construction as early as the second half of 2023, as companies like Amazon lower their expansion projections.

Average cap rates across the net lease industrial market bottomed out mid-year 2022 after reaching a new record low of 5.15 percent. Since then, the sector has reported consecutive quarters of increasing cap rates, ending first quarter 2023 at 5.50 percent – up 35 basis points from the low and 11 basis points higher than last quarter. The market should expect to see cap rates continue to increase as the year progresses, but we are unlikely to see a substantial uptick in sales volume until interest rate growth tempers and buyer-seller pricing expectations can more closely align.

—Posted on Jun. 26, 2023

Source: Northmarq, Real Capital Analytics

The past year has seen a noticeable slowdown in activity for the single-tenant net lease industrial sector. After an unprecedented fourth quarter 2021, continued strong momentum led to first quarter results that ranked it among the top three periods in history.

However, each quarter in 2022 saw declining totals driven by a combination of investor hesitancy and lack of supply, among other influences. Still, the market was able to report a total of $40.5 billion for the year, making it the second-strongest year in history by a healthy margin, but sales volume is likely to remain comparatively stunted for the next several quarters at least.

The current economic environment will undoubtedly influence industrial leasing, sales, and development momentum in the coming months, but there remain bright spots throughout the sector. Sale leasebacks continue to be creative solutions for business and property owners looking to inject capital into their organizations.

Supply chain issues in recent years have highlighted the importance of last-mile distribution space, bulk warehouses, and everything in between. Additionally, industrial outdoor storage facilities continue to garner interest from investors as an up-and-coming subset of the sector. While industrial has been the darling of the net lease market for several years, some investors turned their attention to other asset classes as cap rates compressed, falling to an average low of 5.15 percent at mid-year 2022. Now, with a sharp uptick of nearly 30 basis points in just the last three months, the average cap rate is approaching 5.50 percent, and a continued upward trend could grab the attention of investors seeking yield.

Lanie Beck is the Senior Director of Content & Marketing Research at Northmarq. She is responsible for leading the content strategy for the firm and producing research reports in support of the organization’s commercial investment sales division. Beck joined Northmarq in 2022 following the acquisition of Stan Johnson Company, where she had led corporate research, marketing and communications efforts since 2013.

—Posted on Mar. 29, 2023

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