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.

CBRE has arranged the sale of Post House, a 159-unit multifamily property in Evansville, Indiana. Prosperity Commercial Real Estate purchased the property from Scannell Properties for an undisclosed amount.

CBRE’s Hannah Ott, George Tikijian, Cam Benz, Claire Bullard and Ryan Stockamp represented the seller in the transaction.

“Our team was very pleased to represent Scannell Properties on the sale of this beautiful Class A deal in downtown Evansville,” said Ott. “We look forward to hearing about the continued success at the property and wish the new ownership well.”

Post House is located at 215 Vine St., proximate to the Ohio River Scenic Byway and several riverfront restaurants, retail centers and entertainment venues. Built in 2020, the property features a range of studio-, one- and two-bedroom floor plans averaging 894 square feet and 15 loft-style one-bedroom live/work street-level units.

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 Trepp CMBS Delinquency rate inched up in February, rising five basis points overall to 4.71%. Year over year, the overall U.S. CMBS delinquency rate is up 159 bps.

In the closely watched office segment, delinquencies rose 33 bps in February to 6.63%. The month-over-month increase is roughly in line with the average 37-bp monthly gain for the sector over the past 12 months, according to Trepp.

The retail segment posted the largest decline of all property sectors for the month, dropping 24 bps to 6.03%. That said, retail CMBS still represents the second-highest delinquency rate, compared to 5.45% for lodging, 1.81% for multifamily and 0.43% for industrial.

If loans that are beyond their maturity date but current on interest were included, the delinquency rate would be 5.69%, up seven bps from January. The percentage of loans that are 30 days delinquent is 0.30%, up six bps for the month.

Trepp said the all-time high for the CMBS delinquency rate was 10.34%, registered in July 2012. The COVID-19 high was 10.32% in June 2020.

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.