Single-Tenant Net Lease Still Favored by Investors

In spite of growing economic challenges, investors are overwhelmingly attracted the single-tenant net lease. The asset class posted record numbers in the third quarter.

According to Marcus & Millichap statistics, sales activity for net-leased retail increased between 24% and 27% over the 12-month period ending in June as record rents approached historic highs and vacancy stayed below pre-pandemic levels.
In recent research, business analysts make the following observation: Going forward, investors wanting long-term cash flow may leverage on high pricing in other sectors and shift equity via 1031 exchanges into less management-heavy single-tenant properties. Buyers that are yield-focused will likely continue to target Midwest regions where 30 to 80 basis points higher than the national average.

Marcus & Millichap analysts claim that midsize markets have room for growth, with vacancy rates at record lows and transaction flow gains of over 25% year over year in 11 locations, mostly in the Mountain region and Florida. Tampa had the most closings among Florida cities, and Phoenix had one of the largest single-tenant transaction totals across all U.S. retail areas.

Secondary markets in cities such as St. Louis, Cleveland, Charlotte, Nashville, and San Diego have seen the biggest increases in prices year over year.

With shop openings more than tripling the number of closures in the first seven months of this year, retailers are also expanding their reach as core spending rises. Research further states that historically low number of single-tenant spaces constructed during this span obligated many of these merchants to occupy existing assets which continues to aid single-tenant vacancies and marketing rent advances.

Jimmy Goodman of The Boulder Group stated earlier this spring that when interest rates rise, cap rates for institutional quality net lease assets are anticipated to spread.

While Goodman believes this to be fact, the author writes, “On the other hand, a significant amount of cash from funds and 1031 exchange investors that buy single-tenant assets will counteract that upward trend.” He adds, “It’s just a matter of buyers and sellers determining agreeable pricing.”