Eyes are on all markets to see where CRE is going and if there are sectors that might pan out particularly well. For triple net-lease, it sounds like things are still too uncertain, according to Chris Lomuto’s October market analysis for Northmarq.
There is “new optimism” currently in CRE because of the Federal Reserve’s rate cuts in September and November as well as changes in the political climate. Trump’s announced plans, to the degree that he or others have articulated details, seem likely expansionary for the economy, as Lomuto explains. That likely means good for stock prices. However, with “$4 trillion of new money still in the system,” that could be inflationary according to economics theory.
Standard advice in finance is, while not inviolate, when stock prices move, bond prices track in the opposite. That means bond yields will rise, including the 10-year, which could mean more expensive longer-term financing in CRE.
Based on Northmarq’s comps data, closing on deals has been slow in 2024, but slightly ahead of 2023. That still may be too early to make directional decisions. The report suggests waiting because it typically takes two months at least to get a reliable picture.
Cap rates by property type have grown. For example, between the second quarter of 2022 and the third quarter of 2024, car wash went from 5.20% to 7.07%; C&G from 5.10% to 6.33%; dollar stores from 5.98% to 6.99%; grocery from 5.35% to 6.99%; industrial from 6.18% to 7.12%; office from 7.19% to 7.91%; pharmacy from 5.82% to 7.21%; and QSR from 4.75% to 6,92%.”
Unlike 2022 or 2021, there wasn’t an October surprise of a spike in supply. Lomuto said that it would have seen, after a stretch of high interest rates, a result that wasn’t the case. However, multiple sources have told GlobeSt.com that even a total of 75 basis points in cuts wasn’t enough to excite investors to come off the sidelines. Fed Chair Jerome Powell has signaled that the central bank is in no hurry to keep cutting rates.
The combination of conditions are not “something we would normally associate with falling yields.” If they do start falling and 1031 buyers return, markets could improve. If not, it could be “more bitter medicine.”