A Boulder Group report cites increased borrowing costs as the main factor for the rise
WILMETTE, Ill., April 3, 2023 /PRNewswire-PRWeb/ -- The Boulder Group announced the release of its 1st Quarter Net Lease Research Report today. Cap rates in the single tenant net lease sector increased for the fourth consecutive quarter within all three sectors in Q1 2023. Single tenant cap rates increased to 6.05% (+10 bps) for retail, 7.00% (+5 bps) for office and 6.77% (+12 bps) for industrial in Q1 2023.
"Cap rates in Q1 2023 represented the highest levels since Q3 2020 for both the single tenant retail and office sectors" says Randy Blankstein, President, The Boulder Group. "A decrease in transaction volume for the greater real estate market continues to limit 1031 exchange buyers transitioning into net lease properties."
Transaction volume in 2022 lagged 2021 and experienced more than a 25% decrease for the net lease sector. After years of historically low cap rates for all three asset classes, interest rates put increased pressure on cap rates. Financing costs currently create greater negative leverage situations for most net lease assets than typical in recent years.
"Until the spread between borrowing costs and cap rates decrease, transaction volume will continue to be impacted," adds Jimmy Goodman, Partner, The Boulder Group.
When compared to Q4 2022, the overall supply of net lease properties decreased by more than 6%. The decline in property supply is largely attributed to less motivated sellers removing their properties from the market.
"With economic uncertainty looming, investors are targeting resilient tenants with long term leases" John Feeney, Senior Vice President, The Boulder Group adds.
New construction properties with recession proof tenants including 7-Eleven and McDonald's represent some of the lowest cap rates in the sector. However, these tenants are not immune to upward cap rate pressure. In Q1 2023, cap rates for new construction 7-Eleven and McDonald's properties increased by 35 and 15 basis points respectively. Furthermore, the spread between asking and closed cap rate increased for all three asset classes. The spread rose to 30 basis points for retail, 40 for office and 27 for industrial.
Transactions will be driven by low leverage or all cash 1031 buyers for the highest quality product. However, given the overall uncertainty in the broader real estate market, the depth of the 1031 buyer pool will be limited when compared to historical standards. Sellers with a level of motivation (i.e. debt maturity, backfilled development pipeline, etc.) will continue to move pricing to attract buyers that can offer high certainty of execution.
"Investors will continue to follow the Federal Reserve's monetary policy." according to Blankstein. "Investors largely believe there will be an end to the larger rate increases, of 50 basis points or more, in the near future."
To view the full report: https://bouldergroup.com/media/pdf/2023-Q1-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 $6 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.
Media Contact
Randy Blankstein, The Boulder Group, 1 847-562-0003, [email protected]
SOURCE The Boulder Group
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