Q3 2024 Cap Rate Report
The third quarter of 2024 experienced a continued slowdown in investment sales compared to previous quarters. Prolonged economic headwinds due to high interest rates, inflation, economic uncertainty, and e-commerce disruption have contributed to the lackluster sales volume. Single tenant net lease (STNL) has shown resilience, especially in the quick-service restaurant, dollar store, and convenience store sectors. However, STNL has still experienced significant challenges, especially in the pharmacy and casual dining sectors, which have recently announced major store closures.
Because the Federal Reserve recently began to lower interest rates, the yield on the 10-Year U.S. Treasury yield has fallen below 4% to 3.72% as of September 2024. While net lease acquisitions are typically viewed as higher risk than U.S. Treasury bonds, STNL investments can generally offer higher returns for a minimal increase in risk. With 10-to-20-year lease terms, creditworthy tenants, and annual rent escalations, investors can benefit from reliable cash flows and various tax advantages that U.S. Treasury bonds do not offer. If the Federal Reserve continues to lower interest rates as expected, due to the stabilization of inflation rates, lending costs will decrease and make STNL an even more attractive investment.
Many high-net-worth investors have significant amounts of liquid assets and finance STNL deals with cash or low-leverage strategies, especially for transactions below $5 million. As a result, higher interest rates have had a less significant effect on lower priced deals. Higher priced transactions that exceed $5 million have experienced extended periods on market, resulting in slower activity. However, institutional investors, which dominate the market for higher priced assets, have remained active in STNL transactions this quarter. 1031 exchange investors were also active this quarter and sought to defer their capital gains taxes while optimizing their portfolios.
The average cap rate for Q3 2024 was lower compared to the second quarter, falling slightly to 6.24% by 7 bps for recorded deals. This is still higher than the cap rate for Q1 2024, which indicates elevated risk/return for investors in this sector. Within the STNL sector, the automotive, casual dining, C-store, and medical sectors experienced increases in cap rates between the second and third quarters of 2024. In contrast, the bank, dollar store, pharmacy, and QSR sectors experienced decreases. Overall term remaining for recorded deals in Q3 increased since Q2. The bank, C-store, dollar store, medical, pharmacy, and QSR sectors all experienced an increase in term remaining. Pricing for STNL sales increased slightly from Q2. Q3 sales averaged $2.57 million, which is over $35,000 higher than in Q2.