Q4 2024 Cap Rate Report

The fourth quarter of 2024 experienced an increase in investment sales compared to previous quarters. Prolonged economic headwinds due to high interest rates, inflation, economic uncertainty, and e-commerce disruption contributed to a slowdown in sales volume in previous quarters. Single tenant net lease (STNL) has shown resilience, especially in the quick-service restaurant, dollar store, and convenience store sectors. However, STNL has still experienced significant challenges, especially in the pharmacy and casual dining sectors, which have recently announced major store closures.

Despite the Federal Reserve’s decision to lower interest rates, the yield on the 10-Year U.S. Treasury yield has once again risen above 4% to 4.57% as of December 2024. This is unusual since the yield on the 10-year Treasury was always lower in the 100 days after the first rate cut in the previous seven cutting cycles by the Fed since the 1980s, according to JP Morgan. JP Morgan believes this seemingly paradoxical trend is due to stronger growth expectations and macroeconomic uncertainties. Economists initially predicted that the U.S. economy would grow by 1.2% in 2024, but that estimate more than doubled to 2.7% by the end of 2024. The robust growth puts upward pressure on yields as the expectation for more rate cuts by the Fed decreases. As for economic uncertainty, many questions are raised with regards to the Fed’s future actions as well as the potential inflationary trends that result from the tariffs that are implemented by the new Trump administration. 


While net lease acquisitions are typically viewed as higher risk than U.S. Treasury bonds, STNL investments can generally offer higher returns for a minimal increase in risk. With 10-to-20-year lease terms, creditworthy tenants, and annual rent escalations, investors can benefit from reliable cash flows and various tax advantages that U.S. Treasury bonds do not offer. The Federal Reserve indicates it will hold off on any rate cuts for the time being.

Many high-net-worth investors have significant amounts of liquid assets and finance STNL deals with low-leverage strategies, or just transact all cash, especially for transactions below $5 million. As a result, higher interest rates have had a less significant effect on lower priced deals, which primarily involve high-net-worth investors. Higher priced transactions that exceed $5 million have experienced extended periods on market, resulting in stale listings and slower activity. However, institutional investors, which dominate the market for higher priced assets, have remained active in STNL transactions this quarter. 1031 exchange investors were also active this quarter and sought to defer their capital gains taxes while optimizing their portfolios.

The average cap rate for Q4 2024 was lower compared to the third quarter, falling slightly to 6.35% by 8 basis points for recorded deals. This is still higher than the cap rate for Q1 2024, which indicates elevated risk/return for investors in this sector. Within the STNL sector, the bank, dollar store, big-box, other retail, pharmacy, and QSR sectors experienced increases in cap rates between the third and fourth quarters of 2024. In contrast, the automotive, casual dining, and medical sectors experienced decreases. Overall term remaining for recorded deals in Q4 increased since Q3. The automotive, bank, casual dining, C-Store, dollar store, big-box, and pharmacy sectors all experienced an increase in term remaining. Pricing for STNL sales increased from Q3. Q4 sales averaged $3.0 million, which is nearly $200,000 higher than in Q3.