Q2 2024 Cap Rate Report
The second quarter of 2024 showed a slowdown in investment sales. High interest rates, geopolitical factors, and supply chain bottlenecks all had contributing effects on the slow market. Single tenant net lease (STNL) has still showed resilience within the market but is certainly not immune to these challenges.
Debt markets, while better than Q1, remain in a state of turmoil. In Q4 2023, bond yields spiked dramatically with the 10-year U.S. Treasury yield touching 5%, falling to 3.75% in mid-December, then rising to 4.5% by the end of May. While certainly not viewed as a “risk-free” investment, a net lease acquisition can be assessed as a “bond wrapped in real estate.”
With 10 to 20-year lease terms, credit rated tenants, and annual rent escalations, investors can capture tax advantages and annual returns that remain higher, on average, than treasury yields. Rising cap rates shortened that gap, but still retain a better return. Naturally, investors have not completely sheltered away to the same extent as other sectors.
Since STNL assets are often purchased on an all-cash basis, interest rates and the cost of borrowing have not put a slowdown on lower priced deals (< $5 million). Most high-net-worth investors and 1031 exchange buyers with high liquidity viewed the period of rising interest rates as a time to capitalize on higher yields. Higher priced assets (> $5 million) saw longer days on market, resulting in stale/lost listings.
Institutional investors have been very active in STNL properties this quarter in comparison to recent quarters, signalling that these investors are diverging their funds away from office properties and into more stable sectors.
Re-trades and longer closing timelines became the norm. 1031 Exchange buyers contributed to a high percentage of the deal flows for Q2, which is consistent with previous quarters, while there were investors who opted out to pay their capital gains tax, many were aggressive for the right asset that checked their boxes.
Cap rates for Q2 2024 continued to rise gradually, climbing to 6.36%, an increase of 16.9 bps on recorded deals. The risk/return for investors in this sector remains high but slowly declined from November of 2023 where cap rates sat at 6.4%. Within the SNTL sector, casual dining, dollar stores, medical, QSR, big-box, and pharmacy have all seen increases in their cap rates, while the automotive and c-store sectors have seen decreases. Term remaining for recorded deals in Q2 saw an overall decrease, with only c-stores seeing an increase in their total lease terms remaining. Pricing for these sales have slightly increased in comparison to Q1, with Q2 recording an average price of $2.78 million, a rise of over $16,000.