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Net Lease Retail Investment Slows Amid Rising Cap Rates and Borrowing Costs

Rising cap rates and higher borrowing costs have combined to produce volatility for net lease retail investors. After a promising start, the year ended on a lackluster note, with just $2.44 billion in investor activity during the quarter, according to Northmarq’s most recent single-tenant retail report. That represented a 5.4% quarter-over-quarter decrease but a 5.4% year-over-year increase.

Annual investment sales activity reached $11.3 billion, down from $12.5 billion last year. Annual retail sales volume peaked in 2021 at $28.8 billion.

Sales volume was the strongest in the Southeast at $604 million during the quarter. The West had $580 million in sales volume and the Northeast had $456 million.

Net lease retail cap rates have been increasing for seven consecutive quarters, ending 2024 at 6.81%, an increase of 69 basis points year-over-year. Cap rates were up the most (7.54%) in the Midwest, followed by the Southwest and Mid-Atlantic, both at 6.9%.

“While these increases are in line with broader market trends, they reflect a shift in the way investors are pricing risk,” the report said. “Higher borrowing costs, a dip in 1031 exchange activity and the recalibration of market expectations have all contributed to this upward movement in cap rates.”

Eighty-four percent of all single-tenant retail buyers last year were private investors and REITs Meanwhile, foreign capital diminished with international investors dropping from 11% of net lease buyers in 2023 to just 1% in 2024. Net lease inventory levels remain inflated, but a shortage of large retail portfolio options could be weighing on international buyer activity, the report said.

Over the next year, Northmarq expects investors to remain focused on acquiring well-positioned, income-producing assets, particularly those leased by essential retailers, e-commerce-resistant tenants and stable retail brands with demonstrated growth potential.

“The market can expect to see more value-add opportunities as well,” said the report. "With some retailers exploring ways to optimize their footprints, scale back operations or close their doors entirely, investors can seek out distressed assets or underperforming locations that could be repurposed into something more profitable.”

An example would be a vacant department store in an established secondary market transitioning into a logistics facility, said the report.

Reprinted with permission from the Monday, 03 February 2025 07:19:57 EST online edition of GlobeSt © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.