NNN Price & Cap Rate Update: Room for Negotiation

Aug 25, 2022

Triple net (NNN) investors have been purchasing in a sellers’ market for the last 24 months or so — but the tide is turning. The team at Westwood Net Lease Advisors is seeing more negotiation room for net lease buyers when it comes to purchase price and cap rate.

So, what does that mean for your investment strategy? It’s good news if you’re planning on NNN investing this year and/or using a 1031 exchange before year’s end, but don’t wait. We recommend starting the NNN buying process as soon as you can due to the potential for more interest rate hikes and increased demand by investors looking to close by December 31.

NNN Sellers Have Started Negotiating Sale Price & Cap Rates

Over the last year, NNN property prices remained nearly the same while cap rates compressed. Most sellers weren’t negotiating price or cap rate because high-quality NNNs continued to sell quickly at full asking price and sometimes over, especially for 1031 exchanges.

Like many other investors, you may have delayed investing, waiting for lower prices and higher cap rates. Now, the market has begun to shift. Many NNN sellers are negotiating cap rates up and pricing down, creating even better NNN lease buyer opportunity and value.

Man in a white button-down with P.R.I.C.E. blocks in front of him with a green/red arrow on the last block

NNN Cap Rate Negotiation Opportunity

What is Cap Rate?

Before we discuss current cap rates, let’s re-examine what the cap rate means to your investment strategy. The capitalization rate (cap rate) attached to commercial real estate (CRE) for sale helps reveal if the investment presents a level of risk you are comfortable with and meets your financial goals.

Advertised cap rates are calculated on an all-cash basis, and on absolute triple net properties, the cap rate is your net operating income (NOI) as there are no expenses. Current average NNN cap rates range between 4.50% and 6.00%.

What is Cap Rate Spread?

It is also helpful to understand the cap rate spread, which is the difference between the aggregate nationwide cap rate and the current interest rates offered by lenders. It estimates the incremental difference in returns expected from your CRE investment over risk-free bond returns.

Right now, the 10-year treasury bond is around 3.00%. Banks will build in a spread between the 10-year treasury and the loan interest rate, for instance, 1.75%. So, if the property you want to buy has a cap rate of 5.75%, the spread would be 1.00%. As cap rates increase and the spread widens, you are more highly rewarded with a potential increase in your overall cash-on-cash (CoC) return. This can help you decide what cap rate you need to meet your financial goals.

Absent any immediate interest rate announcements from the federal reserve now is a great time to lock in a higher cap rate on a corporate-guaranteed, long-term NNN lease property while the spread is widening.

Jason Simon, Vice President of Westwood Net Lease Advisors, comments, “We’ve been working with sellers and sellers’ brokers all year to help our clients negotiate triple net deals that fit their objectives, though most sellers were reluctant to budge on price or cap rate. In the last few weeks, we’ve witnessed a shift. Buyers are being more discerning, so many sellers are negotiating price and cap rate to reflect the changing market conditions. It’s a welcome change for our buyers and it helps stabilize the market.”

Since NNN lease properties are highly financeable, smart sellers are realizing they must meet buyers where they want to be to cover their debt or risk sitting on their listed properties longer than anticipated.

plant growing step on coins. concept finance and accounting

Lower NNN Sale Price Opportunity

When NNN buyers’ criteria change because of climbing interest rates, this affects the entire CRE market, and sellers feel the pinch. Thus, in response, they have started to negotiate lower sales prices.

Lowering the sale price and increasing cap rates should create market stability with a more balanced buyer/seller benefit, as long as sellers’ willingness to negotiate keeps pace with changing interest rates and buyers’ needs. When you have negotiating power, you’re more likely to get the most ideal property for your goals.

NNN Cash Buyers

The shift in market conditions has also created some better opportunities for cash buyers. People who
have cash sidelined waiting for better buying opportunities are now stepping out and using the
advantage of cash to scoop up deals. Quick due diligence and closing time frames are allowing cash
buyers to purchase better cap-rate deals than in previous months. If interest rates continue to rise it is
likely the trend of cash buyers coming to the market will continue to rise.

The average triple net lease property price is between $1.5 and $2.5 million.

  • NNN Dollar General: $1–2 million

  • NNN Walgreens: $4–7 million

  • NNN Gas station convenience stores: $2–4 million

  • NNN Fast-food restaurants and QSRs: $1–3 million

  • NNN Early Learning centers and child care assets: $1.5–8 million

Triple net property collage with diff asset types

Watching the NNN Market for You

Simon explains, “Westwood Net Lease Advisors is keeping a close eye on the NNN market daily so we can educate our clients and provide pertinent information to assist with their buying strategies. For example, as we get closer to year’s end, demand for essential triple net lease properties increases for tax reasons, and with the potential for sweeping federal tax reform in 2023, demand may intensify. Add to that more negotiating room in sale price and cap rate, and we anticipate more competition among NNN buyers.”

Therefore, if you are …

  1. a 1031 exchange buyer looking to trade out of high-maintenance, less reliable real estate for a no-maintenance absolute NNN property and defer 100% of the capital gains tax on the sale of your original property, now would be the time to begin the process and potentially gain better returns for using all cash.
  2. leaving the stock market with cash in hand and want a reliable, passive, monthly income for 10 to 20 years while creating instant value in your portfolio, sellers prioritize cash buyers and negotiate accordingly.
  3. new to CRE and/or the NNN lease market and want wealth-building investments that can diversify your portfolio, offer tax opportunities, and potentially create leverage, Westwood can walk you through the process from before the property search through closing (at no cost), so you get just what you’re looking for without any surprises.

No matter what CRE investment experience you have or what your financial goals are, working with Westwood provides you with a buyer advantage in the nationwide market. We will help you secure the most ideal property for your goals, whether you use cash or obtain debt.

Triple net lease properties are passive investments that not only fit a wide range of budgets and financial objectives but also create instant value in your portfolio and provide immediate, stable monthly income in any economy — even in a recession or pandemic.

To Wrap it Up — NNN Sellers Contributing to the Speed of Sales

NNN lease property sellers have begun contributing to the speed of sales by negotiating on price and/or cap rate to meet buyers where they need to be to accelerate closing the deal, and we expect this trend to continue for the foreseeable future.

How do you know what price to offer or what cap rate to ask for? It’s difficult to know pricing and cap rate information without a buyer advisor’s input. Therefore, when you engage a reputable Westwood buyer’s advisor (at no cost to you), you’ll gain market knowledge and be able to make the best offer for your goals. You’ll also benefit from our support, expertise, and negotiating power, and have the confidence to know the offer you’re presenting is more likely to be accepted rather than going it alone.

From before the property search through closing, and thereafter, we’re here for you. Go ahead and contact us today for a no-obligation conversation about your end-of-year triple net lease investment strategy. 314-997-5227


 

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