In the first quarter of 2024, the single-tenant net lease market continued its strong performance, with investment sales activity skyrocketing by 26% compared to the prior quarter, reaching a total of $11.2 billion, according to a report by Northmarq. Although this represents a slight 4.5% decline compared to the same period last year, the robust performance in the first three months of 2024 sets the market on track to surpass the total sales volume of 2023.
Average cap rates for the combined net lease sector increased by 20 basis points during Q1 to 6.50%, marking the highest average seen since mid-year 2015, as indicated by Northmarq's report.
Among the different sectors, single-tenant office properties recorded the highest cap rates at 6.81%, while retail properties remained the lowest at 6.38%. Notably, the net lease industrial sector saw the most significant year-over-year increase, with industrial cap rates now sitting at 6.55%, marking a 102 basis points rise compared to the same period last year.
Buyers and sellers are adjusting their pricing expectations, leading to further increases across all sectors throughout 2024.
A notable shift in buyer distribution across the single-tenant net lease market has been observed, moving from private buyers to Real Estate Investment Trusts (REITs). While private buyers typically capture between one-third and one-half of all net lease activity, REITs have been increasingly active in the market.
Public REITs, accounting for 36% of the overall single-tenant market, have dominated market share in the office and retail sectors. However, in industrial acquisitions, they have been outpaced by a noticeable uptick in foreign capital investment.
The report notes that this shift does not mean private investors are exiting the market entirely. The ratios are expected to even out as the year progresses. However, with interest rates still elevated, some individual investors who are not driven to act by factors like a 1031 exchange might decide to remain on the sidelines for a little while longer.