Retail cap rates have increased across all sectors, with the dollar store and grocery sectors seeing rises of up to 23 and 19 basis points, respectively, B+E said in its latest net lease cap rate report. However, other sectors have experienced only minimal cap rate adjustments since the third quarter of 2024, with convenience stores remaining unchanged and QSR cap rates rising by just one bp.  

Since the end of August, there has been an increase in supply across all retail asset classes, the report stated. The casual dining, banking and convenience store sectors have experienced the largest supply increases, with rises of 21%, 20%, and 17%, respectively.

In contrast, the auto parts and pharmacy sectors saw the smallest growth in supply, with changes of 6% and 7%, respectively. Newly available listings make up 34% of the properties currently on the market. 

The industrial market has experienced a 28% increase in the number of available properties, with the distribution sector seeing a 27% rise. Major industrial players, such as FedEx, currently have 15 properties on the market, with an average cap rate of 6.55% and an average of 6 years remaining on the lease term. Among industrial property types, manufacturing facilities have seen the largest increase in cap rates, which have gone up 16 bps to 7.51% as of Q4. 

Among specialized property types, such as urgent care center and dialysis facilities, cap rates have compressed slightly since the end of Q3, according to B+E.

Cap rates in the single-tenant net lease sector continued to rise in the fourth quarter of 2024 for
the 11th consecutive quarter of increases across all three sectors, The Boulder Group reported. Single-tenant cap rates increased to 6.52% (up two basis points) for retail, 7.78% (up three bps) for office and 7.23% (up eight bps) for industrial.

“Sustained high interest rates and commentary from the Federal Reserve following the December meeting
continues to negatively impact the market,” said Randy Blankstein, president, The Boulder Group. “Overall cap rates rose to 6.76%, representing a three-bp increase from the previous quarter.”

Transaction velocity in 2024 remained significantly below the peak of 2021, yet Q4 experienced an uptick of investor activity. The spread between asking and closed cap rates remained flat or decreased for net lease properties.

“The bid-ask spread compression indicates a gradual alignment between buyer and seller expectations, something that was not experienced in early 2024,” said Boulder Group partner Jimmy Goodman. If transaction velocity continues, the supply backlog of net leased assets will decrease, the report stated.

Cap rates in the net lease sector continued to rise in the third quarter of 2024, albeit slightly, net lease brokerage The Boulder Group reported. The overall rise was three basis points quarter-over-quarter, with the average cap rate coming in at 6.73% in Q3.

All property types saw an uptick in cap rates, according to the Q3 report from The Boulder Group. Office sector net lease properties experienced the largest increase, at eight bps, with industrial up five basis points. Retail edged up three bps in Q3.

The onset of rising cap rates coincided with the Federal Reserve’s series of increases to the federal funds rate. “Additionally, there is a stagnant supply of net lease properties on the market resulting from limited transaction activity from both private and institutional buyers,” said Boulder Group president Randy Blankstein.

Current sellers of net lease properties hope the recent 50-bp cut in the federal funds rate will increase transaction velocity and potentially improve pricing in their favor. However, most market participants remain cautious and don’t expect cap rates to compress near-term unless there are continued rate cuts.

Cap rates in the single-tenant net lease sector increased for the ninth consecutive quarter within all three major property types, according to The Boulder Group’s 2nd Quarter Net Lease Research Report. Single-tenant cap rates increased to 6.47% (up five basis points) for retail, 7.67% (up seven bps) for office and 7.10% (up eight bps) for industrial.

“Elevated interest rates and limited 1031 exchange and institutional buyer activity is the cause of the consistent upward trend in cap rates,” said Randy Blankstein, president, The Boulder Group. “The lack of transactions when compared to recent years is causing property supply to rise without a path to clear the market inventory.”

With a significant number of properties on the market, most investors now believe the current market strongly favors buyers over sellers in terms of compromising on asset pricing. This applies especially to assets that are more highly commoditized, like dollar stores.

“With limited competition, buyers are targeting assets in either income-tax-free states or areas with strong demographic drivers,” said John Feeney, SVP, The Boulder Group. “Secondary buyer motivations include strong real estate fundamentals with credit tenants.”

In the second half of 2024, the pace of cap rate expansion should slow, according to the report. However, cap rates are still expected to rise, given the increase in the supply of net lease properties.

The Newport Beach-based SRS Real Estate Partners Capital Markets team has sold a total of 33 7-Eleven-occupied properties over the past 18 months, valued at $242 million with an average cap rate of 5.27%.

Additionally, SRS has 24 7-Eleven assets currently in escrow or on the market with a combined value of approximately $160 million. All the assets are single-tenant properties with 12 or more years remaining on the lease term.

“Over the past 12 months or so, we have observed that cap rates for 7-Eleven stores are holding steady despite the higher interest rate environment,” said Patrick Luther, SRS EVP and managing principal. “Additionally, the absorption of 7-Eleven assets outpaces comparable credit tenants such as drug store and coffee brands and we have not seen values erode or cap rates rise as much for this brand. Investors are benefitting from the long-term stability, high traffic locations and strong credit rating of this internationally recognized chain.”

Over the past 18 months, SRS has sold 7-Eleven assets in California, Colorado, Connecticut Florida, Nevada, New York, New Jersey, North Carolina, South Carolina, Oklahoma, Tennessee and Texas. The company has properties on the market in California, Florida, New Jersey, North Carolina, South Carolina, Tennessee and Texas.

Net lease cap rates have risen again in the second quarter of 2024, with average caps increasing by 12 basis points quarter-over-quarter to 6.27%, B+E reported. Also up are the average times on the sale market, which increased by 0.8 months during Q2.

B+E’s Q2 cap rate report found that retail cap rates have risen by an average of 12 bps, with some sectors such as casual dining and dollar stores increasing by 21bps from Q1. However, cap rates for quality tenants such as McDonald’s remain relatively stable. Industrial cap rates increased by an average of 15 bps, with FedEx properties rising 39 bps to an average of 6.87%.

“The rise of the 10-year U.S. Treasury continues to put upward pressure on cap rates as investors face higher borrowing costs,” according to the report. “The [Federal Reserve] continues to cite inflation, better-than-expected economic growth and a tight labor market as factors leaving rates unchanged.”

Cap rates in the single-tenant net lease sector increased for the eighth consecutive quarter within all three major sectors in the first quarter of 2024, the Boulder Group reported. Single-tenant cap rates increased to 6.42% (up seven basis points) for retail, 7.60% (up five bps) for office and 7.02% (up two bps) for industrial.

“Cap rates in the first quarter of 2024 represented the highest levels since 2014 for single-tenant retail properties,” said Randy Blankstein, president, The Boulder Group. “However, cap rates for single-tenant retail and industrial assets remain lower than their 20-year historical average by approximately 40 basis points.”

Added Boulder Group partner Jimmy Goodman, “Elevated interest rates continue to impact transaction volume which is lower than prior years. A lack of 1031 exchange buyer activity is resulting in an increased supply of net lease properties on the market.”

Single-tenant property supply increased by more than 9% over Q4 2023 levels. With limited transactions occurring, properties continue to be added to, and stay on, the market. Despite the headwinds in the market, certain sellers including merchant builders or owners with upcoming loan maturities look to meet market pricing, according to The Boulder Group.

Single-tenant net lease cap rates increased in the fourth quarter of 2023 for the seventh consecutive quarter to 6.58%, a seven-basis point increase compared to Q3, The Boulder Group reported. By sector, the increases were eight bps to 6.35% for retail, 14 bps to 7.55% for office and four bps to 7.00% for industrial.

“Cap rates continued to rise in the fourth quarter as asset pricing has not caught up to the massive increase in borrowing costs over the past year,” said Randy Blankstein, president, The Boulder Group. “A lack of 1031 buyers is also causing property supply to increase in a meaningful way.”

The disparity in the spread between the median asking and closed cap rate increased across all asset types from the previous quarter. This was especially apparent in the office sector, where the cap rate spread increased by 12 bps in Q4 to 67 bps. Simultaneously, the number of properties on the market in Q4 grew by 11.6% overall and by 12.7% for the retail sector when compared to Q3.

Although the federal funds rate has remained the same since the third quarter of 2023, dollar stores’ average cap rate increased from 6.34% to 6.51% during Q3, or 17 basis points, B+E reports. This rise is well aligned with market norms, as sellers recalibrate pricing to facilitate financing access and keep pace with Federal Reserve rate hikes, the company says in its report on the dollar store sector. 

“In response to inflationary pressures, dollar stores are experiencing a decrease in customer purchases, particularly for essential items,” the report states. “Non-essential products, which produce higher profit margins, are experiencing less sales volume.”  

Although profit margin pressures will likely continue during economic uncertainty, B+E predicts that Dollar General and Dollar Tree will likely ride out the inflationary period and continue modestly expanding location count. “Moreover, dollar stores have benefitted from a reduction in ocean freight costs and an increased customer base with household incomes over $125,000,” according to the report. 

On-market listings for single-tenant dollar stores increased 13% in Q3 from 477 to 538. This can be attributed to rising interest rates, pushing independent levered buyers out of the buyer pool.