Welcome! If you're here, you've taken a significant step towards diversifying your investment portfolio and securing financial independence for yourself and future generations. The team at Westwood Net Lease Advisors is excited to share our Q1 and Q2 2024 Semi-Annual Report — a deep dive into the current real estate market trends and how to strategically approach NNN lease investing in the second half of the year.
2024: A Shift in the NNN Lease Market
For the first time in two years, the single-tenant NNN lease property market has experienced a notable increase in sales—a promising signal that conditions may be shifting in favor of buyers. Contributing to this momentum are favorable factors like growing inventory and yields that are significantly higher than years past..
This uptick in activity aligns with broader shifts in the post-pandemic retail landscape. E-commerce-resistant sectors such as fast food, medical offices, automotive services, and discount retailers have demonstrated strong performance, benefiting from steady consumer demand and their ability to adapt. Quick-service restaurants have embraced drive-thrus and mobile ordering, while medical offices and urgent care centers continue to provide essential, stable services. Additionally, automotive service providers and discount retailers like AutoZone and Dollar General remain in high demand, making them attractive to NNN investors seeking reliable, long-term cash flow in sectors less impacted by online competition.
As a result of these market dynamics, NNN lease cap rates have risen for nine consecutive quarters across the retail, office, and industrial sectors. Cap rates currently range on average around 5.5% to 7.0%, reflecting the new normal that both buyers and sellers are adjusting to. However, it remains to be seen whether these cap rates will hold as the market continues to evolve.
What’s Driving the Increase in Sales?
Several key factors are contributing to the uptick in NNN property sales:
- Lowering of Interest Rates: The Federal Reserve’s interest rate cuts have been a significant driver in the recent surge in NNN property sales. In Q1 and Q2 of 2024, interest rates were hovering around 6.5-7%, which had created some hesitancy among investors. However, as the Fed started lowering rates throughout the second half of 2024, we are now seeing rates around 5.9-6.25%, encouraging more buyers to enter the market. Lower interest rates reduce borrowing costs, making it more attractive for investors to acquire long-term, stable NNN investments.
- Closing the Pricing Gap: The gap between buyer and seller pricing expectations is narrowing, with some developers more willing to match market prices in order to raise capital or reduce losses.
- Cash is King: Cash buyers are becoming more prevalent, especially for deals under $3 million. Investors are increasingly shifting their funds out of low-yield vehicles like CDs and into NNN properties, where they can find greater returns and long-term stability.
At Westwood, we've seen a rise in all-cash purchases, signaling that more investors are turning to NNN leases as a reliable and lucrative investment strategy.
Impact of Inflation and Consumer Behavior
Inflation continues to play a role in shaping investor behavior and the performance of NNN assets. While the lowering of interest rates helps spur investment, inflationary pressures can impact tenant performance, especially in retail spaces where consumer spending may tighten. Investors should focus on high-credit tenants and industries less affected by inflation (e.g., essential services, healthcare, discount retailers like Dollar General).
What to Expect Heading Toward The End of 2024
The NNN market may experience another uptick in buyer activity and sales heading into the final quarter of the year, following the November elections, as market uncertainty tends to decrease. Additionally, buyers and sellers will be motivated to finalize deals before the end of the year for tax purposes, particularly due to the 60% bonus depreciation, which is set to drop to 40% in 2025. This could lead to a flurry of closings, as investors rush to take advantage of the higher depreciation rates available for this year..
If you have any questions or want to explore how NNN lease real estate could work for you, feel free to reach out to our team at 314-997-5227. For a deeper look at market trends and strategies for the second half of 2024, download our Semi-Annual Report now!
