Net-lease property sales plunged 63 percent to $7.9 billion in the first quarter this year from the same period in 2022, according to CBRE. Industrial sales of $4.1 billion and office sales in the quarter were down 54 percent and 86.5 percent year-over-year, respectively, while retail sales of $2.7 billion were off roughly 41 percent, the brokerage reported.<\/p>\n
![\"Image](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2023\/06\/iStock-1176668727-Image-by-MicroStockHub.jpg\")
<\/a>Image by MicroStockHub\/iStockphoto.com<\/em><\/p><\/div>\n What\u2019s more, with multifamily investment transactions slowing over the last several months, the buyer pool of net-lease properties has shrunk. Typically, apartment owners nearing retirement sell the assets and plow the proceeds into net-lease properties\u2014commonly referred to as a bond wrapped in real estate\u2014as part of a 1031 exchange.<\/p>\n \u201cWe\u2019re not seeing a lot of net-lease trades in general, nor are we seeing a lot of distressed net-lease sales,\u201d reported Will Pike, vice chairman of CBRE<\/strong> in New York. \u201cWe are still in price-discovery mode. There\u2019s just no way around it.\u201d<\/p>\n Because of the dearth of sales, net-lease capitalization rates<\/a> have barely budged since the fourth quarter of 2022, according to The Boulder Group<\/strong>. That\u2019s the case even as interest rates have increased to the point where they are roughly on par with cap rates, which has squeezed any meaningful cash flow out of deals that require financing.<\/p>\n \u201cCap rates haven\u2019t gone up enough to where investors feel like they\u2019re getting good value,\u201d said Randy Blankstein, president of the Wilmette, Ill.-based The Boulder Group. \u201cBuyers are looking for at least neutral leverage, but the majority of properties for sale would still have negative leverage.\u201d<\/p>\n Note: MSCI Real Assets only tracks properties and portfolios of $25-plus million. Therefore, the total net leased investment volume is under-stated, especially since a sizable share of retail transactions are below $25 million. Source: CBRE Research, MSCI Real Assets, Q1 2023<\/em><\/p><\/div>\n As a result, cash buyers of retail properties priced around $3 million or less are driving most of the net-lease activity. Not only has scant new development<\/a> generated a more favorable outlook for retail vs. office and industrial properties, but quick-service restaurants, convenience stores and auto parts stores are among sought-after categories that are expanding.<\/p>\n Retail cap rates of slightly more than 6 percent represent the lowest in the net-lease sector, followed by industrial and office cap rates at 6.8 percent and 7 percent, respectively, according to The Boulder Group. But some deals with long-term leases and credit-rated tenants are still commanding cap rates under 5 percent.<\/p>\n Many cash buyers are betting that they can acquire an asset and then finance it with long-term debt once interest rates stabilize in six months to a year, Blankstein said. In April, The Boulder Group arranged the sale of a 2,594-square-foot Wendy\u2019s in Greenville, Texas, to a cash buyer for nearly $1.3 million. The property has 17 years remaining on the lease and rents increase 10 percent every five years. The capitalization rate was 4.75 percent.<\/p>\n \u201cCash buyers are aware of what\u2019s going on in the capital markets and understand that there are fewer competitors bidding on properties,\u201d Blankstein noted.<\/p>\n Meanwhile, in Valparaiso, Ind., a Chick-fil-A recently sold for $2.4 million and a cap rate of 4.5 percent. The property fetched multiple bids, but the buyer came in some 30 basis points better on a cap rate basis, said Mike Sladich, a managing director with Northmarq<\/strong> in Atlanta, who helped arrange the sale. He also oversaw the recent all-cash sale of an Aldi asset in Duluth, Minn.<\/p>\n \u201cFinding a buyer right now is a little like finding a needle in a haystack,\u201d he said. \u201cBut these buyers were local investors who knew the assets and wanted to own them. And because the deals were relatively small, they could get aggressive and pay all cash or use significantly less leverage.\u201d<\/p>\n In April, The Boulder Group arranged the sale of a 2,594-square-foot Wendy\u2019s in Greenville, Texas, to a cash buyer for nearly $1.3 million. The property has 17 years remaining on the lease and rents increase 10 percent every five years. Image courtesy of The Boulder Group<\/em><\/p><\/div>\n Net-lease retail properties that feature cap rates of around 6.5 percent or higher are also seeing activity, observers say. The higher cap rate may reflect a secondary or tertiary location, a tenant of lower investment grade, or a lease expiration in the short term, they add. But investors in particular can make financing work for those.<\/p>\n In March, Realty Income inked a $1.5 billion deal to acquire up to 415 Cumberland Farms, Tom Thumb, Fastrac and other convenience store assets in the U.S. from United Kingdom-based EG Group Brands. The sale-leaseback transaction featured a cap rate of about 6.9 percent.<\/p>\n \u201cIn a lot of instances, there is still a gap between sellers and buyers right now,\u201d said Ken Hedrick, an executive managing director with Newmark<\/strong> in Tulsa, Okla. \u201cBut institutional investors and REITs are sitting on a lot of capital to deploy and are just waiting for those cap rates to move up.\u201d<\/p>\n Similarly, institutional investors are showing interest in net-lease industrial properties in tertiary markets that tend to have a little higher cap rate, Hedrick said. Typically, the assets must still have strong investment-grade tenants with long-term leases supporting the deals.<\/p>\n \u201cWe\u2019re not seeing as many industrial properties transact, particularly if it\u2019s a prime market with a long-term credit tenant in place,\u201d Hedrick said. \u201cThere is still a big bid-ask discrepancy for those types of deals.\u201d<\/p>\n Given the uncertainty in the office market, net-lease deals for those properties are also hard to come by, Pike said. For a such a transaction to work, the building must have a high utilization rate, he added.<\/p>\n Still, investors who can enhance equity yields with leverage have gravitated toward net-lease medical office and \u201cmedtail\u201d types of properties over the last 24 months, said Alex Sharrin, a senior managing director with JLL<\/strong> in Miami.<\/p>\n \u201cThat dynamic will only continue as the in-place lease economics of those deals tend to be more favorable for private investors,\u201d he said, \u201cand I expect them to continue to deploy capital into medical-related deals.\u201d<\/p>\n Single-tenant laboratory and life science properties are also garnering interest. In May, for example, DivcoWest<\/a> paid $86 million for a 72,506-square-foot lab occupied by the California Institute of Biomedical Research.<\/p>\n![\"Note:](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2023\/06\/US-Net-lease-Market-Share.jpg\")
<\/a>Cash for small deals<\/h2>\n
![\"In](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2023\/06\/Wendys.jpg\")
<\/a>Yield hunt<\/h2>\n
![\"Northmarq](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2023\/06\/Chick-fil-A.jpg\")
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