Cap rates in the single-tenant net lease sector increased for the fourth consecutive quarter within all three sectors in the first quarter of 2023, the Boulder Group reported. Single-tenant cap rates increased to 6.05% (up 10 basis points) for retail, 7.00% (up five bps) for office and 6.77% (up 12 bps) for industrial in Q1. Even new-construction 7-Eleven and McDonald’s properties, which command some of the lowest cap rates in retail, saw increases during the quarter.

“Cap rates in Q1 2023 represented the highest levels since Q3 2020 for both the single-tenant retail and office sectors,” said Randy Blankstein, president, The Boulder Group. “A decrease in transaction volume for the greater real estate market continues to limit 1031 exchange buyers transitioning into net lease properties.”

Transaction volume in 2022 lagged 2021 and experienced more than a 25% decrease for the net lease sector. After years of historically low cap rates for all three asset classes, interest rates put increased pressure on cap rates. Financing costs currently create greater negative leverage situations for most net lease assets than typical in recent years.

Jimmy Goodman, partner, The Boulder Group, added, “Until the spread between borrowing costs and cap rates decrease, transaction volume will continue to be impacted.”