Q1 2024 Cap Rate Report

The first quarter of 2024 showed a slight uptick in investment sales compared to the previous quarter; however, the change is within the noise and is still below historic norms. Continuous economic headwinds including high interest rates, geopolitical factors, and supply chain bottlenecks have all had contributing effects to the slow market. Single tenant net lease (STNL) has still shown resilience within the market, but is certainly not immune to these challenges. 

Debt markets, while better than Q4, continue to remain in a state of turmoil. In Q3, bond yields spiked dramatically with the 10-Year U.S. Treasury Yield touching 5%, falling to 3.75% in mid-December, then rising to 4.2% by the end of March. 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. However, rising cap rates have 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 slow down 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, as the two correlate with one another. Higher priced assets (> $5 million) saw longer days on market, resulting in stale/lost listings. However, institutional investors have been very active in STNL properties this quarter in comparison to recent quarters, signaling that these investors are diverging their funds away from office properties and into more stable sectors. Additionally, re-trades and longer closing timelines became the norm. 1031 Exchange buyers contributed to much of the deal flow in Q1, 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 Q1 2024 continued to rise gradually, climbing to 6.2%, an increase of 7.8 bps on recorded deals. The risk/return for investors in this sector still remains high but has slowly declined from November of 2023 where cap rates sat at 6.4%. Within the STNL sector, automotive, casual dining, dollar stores, medical assets and QSRs have all seen increases in their cap rates, while banks, c-stores, big-box, and pharmacies have all seen decreases. Term remaining for recorded deals in Q1 have seen an overall increase, with big-box, automotive, and pharmacy all seeing significant increases, while casual dining and medical saw drops to their averages. Pricing for these sales have slightly decreased in comparison to Q4, with Q1 recording an average price of $2.62 million, a drop of nearly $17,000.