Cap Rates in Single Tenant Net Lease Sector Rise for 11th Straight Quarter

Cap rates in the single tenant net lease sector continued their upward trajectory in the fourth quarter of 2024, marking the eleventh consecutive quarter of increases across all three sectors. Single tenant cap rates increased to 6.52% (+2 bps) for retail, 7.78% (+3 bps) for office, and 7.23% (+8 bps) for industrial. Sustained high interest rates and commentary from the Federal Reserve following the December meeting continues to negatively impact the market. Overall cap rates rose to 6.76%, representing a three basis point increase from the previous quarter.

While transaction velocity in 2024 remains significantly off the peak of 2021, the fourth quarter experienced an uptick in 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. If transaction velocity continues, the supply backlog of net leased assets will decrease.

The majority of retail sub-sectors remained relatively consistent on a cap rate level with minimal fluctuations quarter over quarter. However, the drug store sector continues to experience immense upward pressure on cap rates. In 2024, the drug store sector experienced the emergence of Rite Aid from bankruptcy, CVS exploring “strategic options” and the potential of Walgreens being taken private by private equity and store closures. As a result, the net lease drug store sector experienced a 23 basis point increase in the fourth quarter and an 8.5% increase in supply.

The net lease market continues to adjust to the higher rate interest rate environment experienced over the past year. Investors will be carefully monitoring the capital markets, especially following the commentary from the December Federal Reserve meeting. If short-term rates continue to decline, the expectation is for investors to get off the sidelines and into longer term duration assets including net lease.