B+E Research and Insights

Q1 2023 Net Lease Cap Rate Report

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05/16/2023 By B+E

B+E Q1 2023 Net Lease Cap Rate Report

Q1 2023 Summary:

Interest rates are causing ripples in the market, resulting in stricter lending practices and climbing cap rates.

Consumer spending, the Fed’s core inflation measure, showed signs of cooling in February. The Fed opted to raise rates on a quarter-point basis at the end of March, as inflation has trended in the right direction but not at the rate the Fed would like to see. With uncertainty remaining in lending, the commercial real estate market is expected to undergo a journey of price discovery throughout 2023. This could lead to a shift in investment strategies as investors seek to navigate the changing landscape and position themselves for long-term success.

As market volatility increases, single-tenant net lease (STNL) becomes more appealing, especially in assets with longer lease terms, investment-grade tenants, and highly passive lease structures. This makes it an attractive option for investors who are looking for more stable, lower-risk investments in the face of an uncertain market.

As the Fed has continued to raise rates and the cost of debt continues increasing, we will likely see an increase in sale-leasebacks because of their ability to help tenants pay off more costly short-term debt while continuing to expand in the current economic climate. In Q1 2023, we observed a steady rise in cap rates across the board.

Cap rates for the car wash sector experienced the biggest surge, rising by nearly 50 basis points between Q4-2022 and Q1-2023. The price shift is likely due to a dramatic increase in on-market inventory, as more than one new car wash property has been listed each day in 2023. However, car wash properties, along with certain gas stations and c-stores, remain quite popular due to their attractive 80% bonus
depreciation rate available in the first year of purchase.

On the other hand, specialty assets like early learning, dialysis, and urgent care saw minimal fluctuations in cap rates. These assets are less susceptible to economic downturns, pandemics, and e-commerce factors, their resilience making them an enduringly attractive option for investors.