Spreads continue to rise: large for retail, moderate for offices, and low for industrial.

The Boulder Group reports that cap rates on single-tenant net lease buildings increased once more in the final quarter of 2023. Increases were seen in all three major groups—office, retail, and industrial—though not equally. For retail, they increased by eight basis points to 6.35%, for industrial by four basis points to 7.00%, and for office by fourteen basis points to 7.55%.
They stated, As asset pricing has not kept up with the massive increase in borrowing costs over the past year, cap rates continued to rise in the fourth quarter. In addition, a deficiency of 1031 purchasers is driving up the supply of real estate. In Q3 and Q4, the total number of properties increased by 11.6% to 4,085. The retail industry increased by 12.7%, from 2,753 to 3,103. Industrial, 9.2%, from 382 to 417. Office saw a 7.2% increase, from 527 to 565.
From 30 to 31 basis points in retail (1 point), 25 to 32 for industrial (7 points), and 55 to 67 for office (12 points), the asking versus closed cap rate spread expanded. In contrast to the recent market shrinkage that JLL reported it had observed, the gaps between buyers and sellers widened.
The drugstore and dollar store sectors are the ones in the net lease retail category that most clearly show the trend toward higher supply, according to the business. “Lease problems at the corporate level and ballooning supply are impeding both sectors, resulting in higher cap rate hikes than the retail industry as a whole. Moody’s downgraded Walgreens from investment grade to “junk” bond classification in the fourth quarter of 2023.
There is currently a large range for the 6.46% in Q4 of 2023 for the drug store industry. At 6.12%, CVS has the lowest rate. Walmart’s score was 6.33. Rite Aid’s percentage was 8.80%.
In the dollar store industry, Dollar Tree has been impacted by the Family Dollar brand, leading the company to reevaluate the Family Dollar assortment, stated Bolder Group. The pressure on Family Dollar is seen in the median requested cap rates by remaining lease term: In the fourth quarter, cap rates for Family Dollar and Walgreens increased by 25 and 15 basis points respectively. Over the course of nine to eleven years, Family Dollar saw 7.25%, Dollar Tree saw 7.00%, and Dollar General saw 6.85%. With Dollar General and Family Dollar at 8.5% and Dollar Tree at 8.40%, things were more evenly distributed at the upper end of the term left, or less than three years.
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