It seems that inflation and a slowdown in the capital markets may have finally caught up with the single-tenant net lease sector, which has posted its fourth consecutive quarter of declining activity, according to an analysis from Northmarq.
In Q4, the single-tenant net lease market saw approximately $14.9 billion in sales, down nearly 16% quarter over quarter and down 66% year-over-year. The overall average cap rate also increased for the first time in three years. However, annually, the industrial market had its second strongest year ever with more than $40 billion in sales, while office and retail posted numbers in line with average volume years.
“The fourth quarter comparison is perhaps overly dramatic due to last year’s record-setting final quarter, but looking forward, it’s likely that we’ll continue to see lower levels of sales volume in the coming quarters rather than a return to near-record highs,” says Lanie Beck, Northmarq Senior Director, Content & Marketing Research. “There is currently enough uncertainty in the market that some investors may choose to observe from the sidelines, taking a more cautious approach. Alternatively, as pricing trends shake out, investors seeking higher yields may find new opportunities.”
Noting that it’s unlikely that investment activity in the sector will stop entirely, Beck also says “the market should be prepared to see conservative activity levels in at least the first half of 2023.”
“Past the mid-year point, demand will be influenced by economic conditions – especially if we enter a recession – interest rate levels, supply/demand dynamics, and the willingness of sellers to correctly price new-to-market assets,” she says. “An imbalance with any one of these influences could impact overall demand levels for 2023 and beyond.”
Multi-tenant retail has also seen a pullback, despite having previously been on pace in 2022 to hit a historic high. Fourth quarter activity slowed so much that the year ended as the fourth strongest ever as multi-tenant retail cap rates jumped by 10 basis points in Q4 and now sit at 6.78 percent.
“This is the highest average cap rate reported in a year, and while it’s likely the start of additional upward movement, cap rate increases are not expected to be dramatic in the next few quarters,” Beck says.
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