Sales of single-tenant, triple-net-leased (NNN) properties have increased for the first time in two years, signaling a potential shift towards a buyer’s market. According to CoStar data, sales in this category rose by 10.6% to $2 billion in the second quarter, compared to the previous quarter. This increase comes after eight consecutive quarters of average declines of 20%.
Despite this recent uptick, the quarterly sales volume remains significantly below the pre-pandemic average of $5.7 billion. The Federal Reserve’s interest rate hikes last year to combat inflation have increased borrowing costs, deterring buyers and contributing to the sluggish recovery in sales to pre-2020 levels.
This rise in single-tenant net-lease property sales stands in contrast to the overall property sales market, which saw a 4% decline in the second quarter compared to the first quarter.
Factors Behind the Increase
One key reason behind the increase in sales is the narrowing gap between buyer and seller pricing expectations. Some developers are now more willing to align their pricing with market rates to raise capital or mitigate losses.
Deal size also plays a crucial role. Smaller deals, especially those around $3 million, are attracting more cash buyers, contributing to the increase in sales.
However, this small sales increase does not necessarily indicate a reversal of the long-term trend. While many lenders and equity investors believe that inflation and interest rates have peaked and are more likely to decrease in the coming years, there is no certainty that this consensus will hold.
Unsold Properties on the Market
The two-year decline in single-tenant net-leased sales has led to a growing inventory of unsold properties. With more properties available, the market dynamics have shifted in favor of buyers. High interest rates, fewer tax-free property exchanges, and limited institutional investor activity have previously contributed to declining sales. Furthermore, fewer transactions and rising borrowing costs have pushed up capitalization rates, which can indicate increased investment risk due to property value declines, falling rent expectations, or market uncertainty.
Cap rates in the single-tenant net-lease sector have risen for nine consecutive quarters across retail, office, and industrial property types. Although the pace of cap rate increases is expected to slow in the latter half of 2024, they are still projected to rise due to the growing inventory of net-lease properties.
Increased Single-Tenant NNN Sales Indicate Shift Towards Buyer’s Market
The recent increase in single-tenant net-lease sales suggests a potential shift towards a buyer’s market, driven by industrial property transactions. However, the market remains below pre-pandemic levels, and the long-term trend of rising capitalization rates continues. Investors should closely monitor market conditions and consider the evolving dynamics as they navigate the single-tenant net-lease sector.
To explore further how NNN lease investing fits into your investment strategy for 2024, contact our team for a no-obligation conversation. 314-997-5227.
