The Boulder Group announced the release of its 3rd Quarter Net Lease Research Report today. The report features a new and more comprehensive format with specific net lease sector information. Cap rates in the single tenant net lease sector increased for the sixth consecutive quarter to 6.51%, a 11 basis point increase compared to the prior quarter. When broken down into sectors, single tenant cap rates increased to 6.27% (+10 bps) for retail, 7.41% (+14 bps) for office and 6.96% (+16 bps) for industrial in Q3 2023.
“The consistent rise in interest rates continues to be the primary driver for the upward pressure on cap rates,” says Randy Blankstein, President, The Boulder Group. “Over the course of the third quarter, the 10 Year Treasury peaked at 4.68% which is almost 100 bps higher than the lowest level of 3.73% during the same time period.”
The persistent rise in interest rates further amplified the pricing dislocation in the net lease market between buyers and sellers.
“The gap between buyers and sellers remains consistent and properties are sitting on the market longer,” adds Jimmy Goodman, Partner, The Boulder Group. “In the third quarter of 2023, the marketing time of net lease properties grew when compared to the prior year by 25% to more than eight months.”
The supply of net lease product on the market increased by approximately 10% in Q3 2023. As the supply of net lease properties increased, the buyer pool for net lease properties decreased. Across all commercial real estate asset classes, sale transactions decreased by more than 50% through the first three quarters. Accordingly, the amount of 1031 exchange buyers in the market remains limited. 1031 exchange buyers historically made up a large segment of the buyers of properties below $10 million. With limited 1031 buyers, sellers turned to institutional and REIT buyers. However, increased cost of capital and limited competition pushed cap rates higher for both REITs and private buyers.
“Traditionally, the fourth quarter of the year represents greater transaction volume than other individual quarters as funds are looking to fill yearly allocations,” John Feeney, Senior Vice President, The Boulder Group adds. “However, with many institutional and REIT buyers achieving their target allocations early, the expectation is for a slower than normal quarter.”
With interest rates and cost of capital at the forefront of investors’ minds, the focus will be on the upcoming Federal Reserve meetings. All cash and 1031 buyers, while limited, will look to take advantage of the increased property supply in order to buy assets at higher cap rates. Ultra-low cap rate assets will be concentrated in properties with “one-of-a-kind” attributes in top markets with long term leases and strong tenants.
To view the full report: https://bouldergroup.com/media/pdf/2023-Q3-Net-Lease-Research-Report.pdf
About The Boulder Group
The Boulder Group is a boutique, Chicago-based investment real estate services firm specializing in transaction and advisory services for single tenant net lease properties. Founded in 1997, the firm has closed over $8 billion of net lease property transactions. The firm provides a full range of brokerage, research, advisory, and financing services nationwide. The level of annual, single-tenant transaction volume consistently ranks the firm in the top 10 companies nationally, according to industry benchmarks determined by CoStar and Real Capital Analytics.
Company Name: The Boulder Group
Contact Person: Randy Blankstein
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Address:3520 Lake Avenue Suite 203
Country: United States