Net Lease Cap Rates Rise Again
Cap rates for the single tenant net lease sector have increased every quarter for the past two years. The Boulder Group’s first quarter net lease research report showed cap rates up for the eighth consecutive quarter within all three sectors to start the year. The higher cap rates combined with elevated interest rates are contributing to a slower transaction environment.
Single tenant cap rates increased to 6.42 percent (up 7 basis points from the fourth quarter of 2024) for retail, 7.60 percent (up 5 basis points) for office and 7.02 percent (up 2 basis points) for industrial.
Cap rates in the first quarter were at the highest levels since 2014 for single tenant retail properties. However, cap rates for single tenant retail and industrial assets remain below their 20-year historical average by around 40 basis points.
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The dollar store and drug store sectors, continued to experience the greatest cap rate expansion with both segments seeing double-digit cap rate increases in the first quarter of 2024.
The report showed cap rates for the dollar store sector were up 13 basis points from 6.86 percent in the fourth quarter of 2023 to 6.99 percent in the first quarter of 2024. The net lease drug store sector saw cap rates rise 10 basis points from 6.46 percent in the fourth quarter of 2023 to 6.56 percent in the first quarter of 2024.
For the other retail segments within the report, the auto sector saw the lowest cap rate expansion, up 2 basis points from 6.28 percent in the fourth quarter of 2023 to 6.30 percent in the first quarter of 2024. The quick service restaurant sector saw cap rates increase 6 basis points from 5.59 percent in the fourth quarter to 5.65 percent in the first quarter of 2024. Cap rates for the casual dining sector rose 7 basis points from 6.50 percent in last year’s fourth quarter to 6.57 percent in the first quarter of 2024.
Interest rate impacts
Net lease owners looking to refinance or sell properties before the end of the year are watching the Federal Reserve closely to see if there will be any interest rate cuts coming, as anticipated, in the second half of 2024. At the March Federal Open Markets Committee meeting, the Fed kept the Benchmark rates at a range of 5.25 to 5.5 percent, where they have been since July 2023. During a press conference following the FOMC meeting, Fed Chair Jerome Powell said the Fed was still being cautious and watching for inflation risks. But he did say if the economy evolves as projected, rate cuts are likely, and he anticipated the federal funds rate could be 4.6 percent by the end of this year. Market participants are hopeful that will result in increased transactions for the second half of the year in the net lease sector.
According to the report, the elevated interest rates continue to impact the transaction volume for net lease assets, which is lower than prior years. Moreover, the lack of 1031 exchange buyer activity is resulting in an increased supply of net lease properties on the market.
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