November 4, 2022

Single-Tenant Net Lease Market on Pace for Strong Finish

The single-tenant net lease market is likely to end the year strong, with sales activity on track to make 2022 the third strongest year in history.

That’s according to a recent analysis from Northmarq, which notes that if current activity levels carry over to Q4, the year will claim $74 billion in annual sales volume. In particular, the industrial market is set to report its second strongest year on record, while the office and retail sectors are more likely to have closer to average years.

Overall average STNL cap rates leveled out during the third quarter as sales activity declined for the third straight quarter. Private buyers have the largest share of the market, according to the report, and while the market is “significantly” off-pace to reach 2021 numbers, strong annual performance is still within reach.

“In the single-tenant net lease market, we’ve seen investment sales volume decline over the past three quarters and compared to the record-setting end to last year, current activity levels may feel somewhat lackluster,” said Lanie Beck at Northmarq. “Put in perspective though, the market is on pace to have a very solid year, perhaps topping the $70-billion-mark and solidifying 2022 as a top three year in history. However, fourth quarter will be telling. The final three months of the year will not only dictate how 2022 gets logged in the history books, but it will also set the tone for 2023.”

Investors are still flocking to the sector, with sales activity for net-leased retail rising between 24% to 27% across the 12-month span ending in June, according to Marcus & Millichap.

“Moving forward, investors seeking long-term cash flow may capitalize on high pricing in other sectors and move equity via 1031 exchanges into less management intensive single-tenant properties,” firm analysts note. “Yield-focused buyers may target Midwest markets with increased frequency, as Detroit, Chicago, Kansas City, Cleveland, Indianapolis, Milwaukee and Minneapolis are home to average returns 30 basis points to 80 basis points above the national mean.”