Why the Single-Tenant Net Lease Sector Could Be Past Its Peak

Orginally published by Commercial Property Executive

Based on its second-quarter performance, the single-tenant net lease sector is likely somewhat past its peak for this market cycle, according to a second-quarter market snapshot from Stan Johnson Co. But the true picture will probably not be revealed for another quarter or two. 

Lanie Beck, SJC’s director of corporate research, marketing and communications, writes: “It’s almost certain that we’ll look back and identify fourth quarter 2021 as the true peak of this cycle.” 

Similarly, despite a consensus among economists that we’re in a “technical recession,” it’s likely to be a while, perhaps year-end, before a true recession is identified, if at all, the report says. 

In the meantime, after a spectacular fourth quarter of 2021, which brought end-of-year sales volume in the net lease sector to more than $103 billion, the first half of this year has seen sales volume closer to normal or average levels. “We’re likely to see more of that in the foreseeable future, pending a major market event,” Beck commented. 

During the fourth quarter of 2021, single-tenant net lease sales activity topped $40 billion. The first two quarters of this year saw successive declines in sales activity to just $15.8 billion in the second quarter. Still, that figure would have been unremarkable for most of the previous 10 years. 

A closer look 

Specifically on the office side, second-quarter sales volume was $3.8 billion, down 53 percent from the previous quarter and down 21 percent year-over-year. Industrial volume was $8.4 billion, down 32 percent from the first quarter and down 14 percent year-over-year. 

If the overall single-tenant net lease sector remains at its current pace, it should tally about $80 billion in sales for the year, which would approximately equal 2019, the second-strongest year on record. But if volume levels decline further, “the market will fall short of this target but will still have a comparatively strong year,” Beck wrote. 

Cap rates in the single-tenant net lease market have compressed by 42 basis points year-over-year, falling from an average of 6.08 percent to 5.66 percent at midyear 2022. 

On the office side, the single-tenant net lease investor pool has remained largely stable in its makeup. Among office buyers, private and institutional investors (each at 36 percent) are the dominant players, with REITs and foreign buyers representing only a combined 9 percent among them. 

For industrial, however, institutional investors surged past REITs (now 24 percent) to take the lead at 33 percent of market share. Private buyers were responsible for 31 percent of acquisition volume, and international investors accounted for 10 percent of dollar volume in industrial, their preferred asset type, compared to office and retail.