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June 15, 2024
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Single Tenant Investment Sales Volume Lowest Since 2012


By Lanie Beck, Senior Director, Content & Marketing Research, Northmarq

Q4 2023 Overall Single-Tenant Market

The single-tenant net lease market continued to experience significant reductions in investment activity throughout 2023, and volume declines have now been reported in seven of the last eight quarters. With $40.6 bil in sales, investment activity reached a recent annual low not seen since 2012. Quarterly sales volume, at just $7.4 bil for fourth quarter 2023, was down 31.7% from third quarter and 57.9% year-over-year. Across the three net lease sectors – office, industrial, and retail – quarterly and annual volumes saw widespread reductions as well, with the most significant changes reported for retail (down 40.8% from last quarter) and office (down 63.5% from last year).

Average cap rates continued their upward climb during fourth quarter 2023, rising 19 basis points to a new overall average of 6.29%. Since the end of 2022, the overall average has risen 62 basis points, driven primarily by increases within the industrial sector. While all single-tenant property sectors reported rising cap rates during fourth quarter 2023, the retail sector posted the most dramatic quarterly increase at 23 basis points, and its average is now back above the 6.0% mark.

Looking ahead to 2024, opportunities for all-cash investors, as well as those able to secure favorable financing, will be available across all property types. Healthcare assets remain popular, which will continue to lend support to the office sector until it regains its footing. Investors may also be able to capitalize on distressed office assets as debt comes due and owners look to trade out of the sector. Industrial product of all kinds continues to play a critical role across the industry, and expanding net lease retailers are expected to deliver a host of new product to the market in the coming months, offering newly constructed properties with stable, long-term leases in place. Overall investment volume is likely to stay muted, especially early in the year, and the markets are continuing to watch interest rates closely. Once financing becomes more accessible to borrowers, investors are expected to return in earnest, provided seller pricing aligns with expectations and the listing supply is ample enough to satisfy demand.

Q4 2023 Single-Tenant Office

The single-tenant net lease office sector experienced a challenging fourth quarter 2023, with investment sales volume totaling only $1.8 bil. This represents an 11.5% decrease from the previous quarter and a significant 63.5% drop year-over-year. As we look across the full year, sales activity for 2023 amounted to only $7.7 bil, marking a substantial decline from recent annual totals. Cap rates across the office sector continued their upward trend, rising by seven basis points last quarter to end the year at an average of 6.71%. Steady increases have brought the year-over-year cap rate growth to 55 basis points.

Several factors are influencing current conditions in the office market. Lease renewal activity has become problematic for landlords as tenants grapple with pandemic-induced work trends. The shift towards hybrid and work-from-home models has led to decreased demand for office space, with tenants often renewing leases for less square footage or vacating spaces altogether. This trend is expected to continue as 2024 brings another wave of lease renewals. Rising vacancies and sublease availabilities, coupled with increased interest rates, have made financing more difficult to secure and afford. When deals are unable to provide a satisfactory return on investment, transactions stall, prompting investors to seek alternative investment opportunities.

Despite these and other influences, there are still bright spots if you look closely enough, especially within the single-tenant market. Many single-occupier office buildings and campuses are mission-critical facilities, and these are often the last locations a company elects to downsize or eliminate. Additionally, specialty office spaces, including healthcare assets and lab and R&D facilities, offer unique benefits. Their highly specialized nature makes these sites "sticky" for tenants, which contributes to long-term occupancy and helps to provide some much-needed stability in the turbulent market. However, it remains clear that the sector faces ongoing challenges. As the market continues to adjust to new work trends and economic conditions, stakeholders in the single-tenant net lease office sector will need to navigate these complexities and adapt their strategies accordingly.

Q4 2023 Single-Tenant Industrial

In the final three months of 2023, the single-tenant industrial sector logged just $3.6 bil in investment sales. This slow finish to the year brought annual totals to $20.8 bil, reflecting a more than 60% decline year-over-year. Cap rates continued on an upward trajectory, rising 18 basis points during fourth quarter, and a full 100 basis points year-over-year, to end 2023 at an average of 6.37%. With interest rates still elevated, the current outlook for 2024 calls for more of the same. However, experts are now less concerned about a recession, inflation is nearing the Fed’s target, and the market is anticipating rate cuts likely toward the middle of the year. This could help jumpstart investment activity, especially in the industrial sector which has seen tremendous levels of both tenant and investor demand in recent years.

To satisfy this demand from tenants during, and even before the pandemic, the industrial market saw a significant amount of new construction. As the market has slowed, we’ve seen some of this speculative construction remain vacant which has prevented rental rates from soaring. But with development on the decline, and demand still relatively strong, vacancy and rental rents should adjust accordingly in the coming months and years. Future demand for industrial space will undoubtedly come from traditional warehouse and distribution users, but the U.S. has seen a boom in manufacturing with onshoring and reshoring driving demand for new and existing properties. As these trends gain further momentum, investors can capitalize on this growth.

In 2024 and beyond, industrial stakeholders should watch the logistics sector closely. Last-mile fulfillment centers have been a growing need for many companies, but we’re beginning to see cold storage components added to these developments, as well as an uptick in the demand for fully dedicated cold storage facilities. This trend is being driven directly by the consumer, as grocery and meal plan delivery services gain popularity – retailers and servicers providing perishable goods have a greater need for their facilities to be strategically located close to the end consumer, which could influence future investment and development activity.

Q4 2023 Single-Tenant Retail

While much of the market has been on a steady downward trajectory in terms of investment sales volume, the single-tenant net lease retail sector has reported some fluctuation over the last two years. With comparatively strong first and third quarters in 2023, second and fourth quarters reported suppressed activity. In the final three months of the year, the net lease retail sector posted $2.1 bil in sales volume, reflecting a nearly 41% drop from the previous quarter and more than 44% down year-over-year. Annual investment sales activity topped out at $12.2 bil, making it the sector’s slowest year since 2012. Cap rates are on the rise, ending 2023 at an average of 6.14%. This pushes average rates above the 6.0% mark for the first time in nine quarters.

The Southeast region has been the strongest for net lease retail investment sales activity in each of the last three years, as investors respond to population growth and migration patterns. Retailer expansion in this region has been robust as well, with brands like ALDI and Publix in the grocery sector, retail banks including Fifth Third and Chase Bank, and fast-food restaurant chains like Hardee’s, Chick-fil-A, and Scooter’s Coffee, among others, all actively expanding in target Southeast markets.

Still, the retail sector has its challenges. Recent inflation has elevated the price for goods and services, and the cost of debt has risen due to higher interest rates, causing pain for those consumers carrying high credit card balances. Consumer spending was strong in 2023, with holiday sales nearing $1 tril and breaking records yet again, but experts are questioning the sustainability of this activity. While many are no longer calling for a recession, a pullback in future consumer spending would lead to a reduction in retail and food sales, and this could potentially impact retailers’ appetites for growth. This could prompt some brands to consider altering their expansion plans, leading to lower levels of new development and therefore a reduction in new supply for net lease investors.

Q4 2023 Multi-Tenant Retail.

The multi-tenant retail sector, along with the rest of the market, experienced its fair share of challenges in 2023 as elevated interest rates suppressed transaction activity. In the final three months of the year, $8.9 bil in sales were reported, bringing the sector’s annual total to $44.5 bil. This reflects a 37% year-over-year decline in transaction volume, but despite the reduction, the market was still able to outperform pandemic-era levels.

Average cap rates for shopping centers across the nation witnessed a four-basis-point increase during fourth quarter 2023, ending the year at 7.10%. Regionally, however, there is a roughly 200-basis-point spread between the West, which saw cap rates decline to a year-end average of 5.90%, and the Midwest, where rates are highest at 7.91%.

As interest rates stabilize, and potentially decline at some point in 2024, signs point to a relatively quick recovery for the multi-tenant retail sector. It took just 18 months for the market to bounce back from the pandemic, as transaction velocity essentially jumped from record lows to record highs in that short period of time.

Today, vacancies are incredibly low, as is new construction, and with an overwhelming number of retailers looking to actively expand their footprints, shopping center space is in high demand. Even a small reduction in interest rates could jumpstart investment activity as buyers look to enter the sector or build onto their existing portfolios.

Furthermore, with inflation now nearing the Fed’s target, developers that have been stymied by the rising cost of supplies may be able to move forward more easily with planned projects, helping to address today’s lack of supply. This in turn will create opportunities for commercial real estate investors who are eager to acquire high-quality, newly built centers located in prime retail corridors that are positioned well for long-term growth.

Key Take-Aways from the Q4 2023 MarketSnapshot Series of Reports

STNL Sales Volume:

• Since reaching an all-time high in Q4’21, overall sales volume has declined in seven of the last eight quarters and in Q4’23, investment activity reached a new recent low of $7.43B – the lowest since Q2’12.
• Q4’23’s volume is down 31.7% from the previous quarter and 57.9% from this time last year.
• All three STNL sectors reported quarterly, as well as annual, reductions in activity:
• Office - $1.77B (down 11.5% from last quarter, and down 63.5% YOY)
• Industrial - $3.55B (down 33.0% from last quarter, and down 60.5% YOY)
• Retail - $2.12B (down 40.8% from last quarter, and down 44.5% YOY)
• With only $40.6B in sales logged for the year, the STNL overall market reported its slowest activity in more than a decade, as predicted.

STNL Cap Rates:

• The STNL market reported another increase in cap rates during Q4’23, rising 19bps to a new overall average of 6.29%.
• Since year-end 2022, the overall average has risen 62bps, and further increases are expected in 2024.
• All STNL property sectors reported cap rate increases during Q4’23, with the retail sector posting the most dramatic quarterly increases:
• Office – 6.71% (up 7bps from last quarter, and up 55bps YOY)
• Industrial – 6.37% (up 18bps from last quarter, and up 100bps YOY)
• Retail – 6.14% (up 23bps from last quarter, and up 52bps YOY)

STNL Buyer Distribution:

• As has been the case for many years, private buyers continue to drive net lease investment activity, with 46% market share in 2023. Institutional investors ended the year with 21% market share – a 5bps reduction from the previous year – while Public REITs equaled last year’s activity rate at 17%. With just 10%, internationally based buyers reported an uptick in activity from 2022, but figures remain lower than we’ve seen in recent years.
• Office – private buyers accounted for 47% of the buyer pool in 2023, with institutional investors as the next closest group (27%). REITs were less active with just 10% of market share.
• Industrial – private buyers (39%) and institutional investors (29%) were the most active for this sector in 2023, with REITs ending the year at just 15%
• Retail – the most dominant buyer groups were private investors (57%) and REITs (24%), while institutional investors remain largely inactive, with just 4% of market share in 2023

MT Retail:

• Activity levels for MT retail have fluctuated in recent quarters, with Q4’23 ending on a down note. With $8.9B in sales volume reported, this marks the sector’s slowest quarter since Q1’21.
• Despite reduced volume, investment sales activity remains above levels posted during the pandemic, when transactions all but stopped.
• Sales volume was down 28.8% jump from the previous quarter, and down 37.2% YOY, with $44.5B reported for the year.
• Cap Rates
• During Q4’23, average cap rates for the MT retail sector increased just 4bp, ending the year at 7.10%. YOY, average cap rates have increased 46bps.
• Regionally, all but the Northeast (6.70%) and West (5.90%) are now reporting average cap rates above the 7% mark.
• Buyer Distribution
• While private investors (56%) remain the most active buyer group for MT retail, their market share is the lowest reported since 2018 due to strong activity from domestic REITs (22%) which saw a substantial YOY increase in activity, rising from 9% market share in 2022.
• International capital also saw a return to the market, rising from 1% in 2022 to 14% in 2023, while institutional investors have pulled back (6% vs. 15% in the previous year).

Methodology: analysis includes sales greater than $2.5 mil. Although these figures should be considered final for Q4 2023, future revisions will be made as we learn of additional transactions and corrections. Therefore, only the current quarter’s reports should be used to reference historical data, as data is updated to reflect these changes and corrections.

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