Single Tenant Net Lease Market Outlook
Economic uncertainty, geopolitical unrest, and historically low interest rates continue to drive tremendous demand from retail and institutional investors into the single tenant net lease space with our desk completing more than $100M in transactions in 2021.
Since 2016, we have tracked approximately ~$9 billion or 3,300 active single tenant net lease properties for sale on a monthly basis and have seen inventory decrease by roughly 30% since the beginning of Covid-19. Cap rates for certain net lease assets have traded at historic lows in sectors such as dollar stores, quick service restaurants, pharmacies, and gas stations.
Demand for “essential retail” surged during Covid-19 with restrictions putting nearly 9 million U.S. small businesses in fear that they won’t survive the pandemic.* Now with the outbreak of war in Continental Europe, we expect interest rates to remain low throughout 2022 and for there to be a “flight to safety” as investors exit more management intensive and speculative assets for “essential” income producing assets secured with long-term leases guaranteed by strong tenant credit profiles.
As labor, materials, and costs spike, inventories decrease, and there has been a lull in supply of new construction. As developers work through inflationary pressures and revised timelines to completion, we can expect cap rates to remain compressed. The 10-year treasury broke 2% for the first time since 2019 but has pulled back as there continues to be geopolitical unrest surrounding the unfolding events in Eastern Europe. Historically, the 10-year treasury has traded around 4%, the recent pull back in March of interest rates (~1.7%) should prompt investors waiting for the right setup to take action. Per the Fed’s comments, we expect interest rates for commercial loans to increase faster than single tenant net lease cap rates. Idle investors will miss opportunities as the scheduled rate hikes take effect and the economics do not support aggressive borrower profiles.
Fixed income indices such as Bloomberg Barclay High Yield, JP Morgan Emerging Market Bonds, and Bloomberg Barclays Muni Index are offering fixed income investors yields from 1.80-4.50%**. Investment grade single tenant assets, on long-term leases, paying monthly distributions, with scheduled rent increases, located in mission critical retail and/or healthcare corridors with the income being sheltered by depreciation will continue to offer investors a more competitive risk adjusted return than major fixed income indices.
NetLeaseFinder.com has been able to develop proprietary technology and rapidly grow an extensive network of industry professionals in the net lease space of over 50,000 developers, REITS, institutional money managers, principals, and agents. By being able to leverage our technology and strategic relationships, we can actively scan the market in real- time for the most competitively priced assets and regularly source off market deal flow direct from preferred developers. As a result of a very competitive market place, current market conditions and successfully completing profitable acquisitions and dispositions for clients we have launched an actively managed single tenant net lease fund to service the demand from Institutions and Financial Advisors. Please visit www.NLXE.com to learn more.
** As of 3/1/22
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