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.

The Trepp CMBS Special Servicing Rate increased another 34 basis points to 9.14% in October 2024. Over the past six months, the rate has increased by just over 100 bps, with the October figure reflecting the 10th consecutive monthly increase, according to Trepp.

Among the major property types, the office sector saw the highest month-over-month increase in the special servicing rate, climbing 136 bps to 13.94%. Compared to October 2023, the office rate is up 539 bps. The last time the office special servicing rate breached 13% was in November 2011; it remained above 13% until July 2012.

Meanwhile, the lodging rate has continued to climb, reaching 8.32% in October; the last time it was above 8% was in May 2022 when the rate was coming down from COVID highs. Multifamily and retail also experienced upticks in October, each rising by 14 bps to 6.21% and 11.37%, respectively.

The Trepp CMBS Special Servicing Rate rose 33 basis points to 8.79% in September. This was the ninth consecutive monthly increase and the second-largest uptick of 2024, the firm reported.

Distress was consistent throughout, with the respective special servicing rates of the five major property types all increasing. Although these increases varied in degree, four of the five property types increased by at least 30 bps. Driving the overall September increase was office, which surged 67 bps to 12.58%.

The office rate is now up more than 200 bps over the past four months alone, with distress continuing to mount. More than half the September dollar amount of new transfers to special servicing occurred in the sector, according to Trepp.

The multifamily rate rose 36 bps to 6.07%, surpassing the 6% mark for the first time in nearly nine years. Furthermore, the retail rate reached a near two-year high of 11.22%, and the lodging rate hit a two-year high of 7.84%. Even with an 11-bp increase in September, though, industrial CMBS in special servicing still comes in below 1%.

The Trepp CMBS Special Servicing Rate ticked up slightly in June, rising two basis points to 8.23%. Although the monthly increase was minimal, Trepp noted that it represents the sixth consecutive monthly increase. Prior to the COVID-19 pandemic, the last time the rate eclipsed this month’s 8.23% was January 2014, according to Trepp.

A few property types experienced more than modest change for good or bad in June. Mixed-use special servicing rose the most, up 40 bps in June to 9.34%. This is the first time the mixed-use rate has eclipsed 9.00% since July 2013. The office rate also rose in June, increasing 27 bps to 10.79% after its first decline of the year in May.

Two property types that saw material improvement were lodging and multifamily, with drops of 54 and 26 bps, respectively. Although the multifamily rate experienced some relief, it remains relatively high, still sitting above 5.00%. Retail continues to hold the highest special servicing rate at 10.82%, while at the other end of the spectrum sits industrial at 0.33%.

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.

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.