Single-Tenant Net Lease Sector Should Soon Reverse Cap Compression

The single-tenant net lease sector has passed its peak performance, based on Q2 data from Northmarq.

With rising interest rates and rampant inflation, net lease investors have been watching the market very closely, keeping note of cap rate compression, sales volume, and buyer demand.

“This could be the last quarter before we start to see a reversal of [the cap rate compression] trend,” according to Lanie Beck, Northmarq Director of Corporate Research, Marketing & Communications.

“Deals being priced today will influence closing cap rates reported for third quarter 2022 and beyond, so investors must keep in mind the lagging nature of this statistic.”

In the last three months, the overall average cap rate declined 10bps and has now been below the 6%-mark for a full 12 months, Beck noted.

Q2 activity marked a decline for a second straight period, falling 35% from Q1; YOY, volume is down 17% from Q2 2021, according to the report.

Construction Low Compared to Historical Norms

Doug Ressler, Yardi Matrix, tells GlobeSt.com, “The single-tenant net lease sector is well positioned for improving fundamentals this year as construction remains low versus historical norms and more companies evolve creative hybrid office plans. This scenario is resulting in quicker rent growth in trophy office properties to backfill spaces.”

Ressler said to look for investors to focus on tenants that demonstrated resilience during lockdowns, mixed-use and adaptive reuse and that REITs are also targeting assets with high credit grade tenants and longer lease terms.

Chris Maling, principal with Avison Young, tells GlobeSt.com that while sales in the QSR sector are down to comparative quarters, this is temporary due to inflation-related shock.

“Now that consumers are experiencing inflationary pressures, we will likely see more sales at QSRs due to price-point considerations in order to feed their families,” Maling said. “Many will forgo sit-down concepts and other higher price point options. Overall, the forecast is strong for increased sales and net revenue for Q3 and Q4 of 2022.”