B+E Q3 2022 Net Lease Cap Rate Report
Q3 2022 Summary:
In Q3 2022, B+E is seeing an influx of on-market properties, with over 4,000 properties available in the net lease market. Despite the Federal Reserve’s rate hikes totaling 225 basis points this year and talks of a looming recession, cap rates in most net lease sectors have continued to compress. Inflation fears are leading investors to look more toward safer investments where they are guaranteed a steady flow of income.
On September 21, the Fed increased rates by 75 basis points; two more increases are expected by year end. The feeling is that these increases will be the tipping point for the peak pricing and record-level cap rates we’ve been seeing in the market. We already see the effects of this as lenders are requiring borrowers to bring more capital to the table: deals that used to require 75% LTV are now around 55%-60% LTV.
In our report, quick service restaurants (QSRs), Automotive, and Early Learning sectors saw the largest increase in on market properties from Q2 to Q3 while their cap rates continue to compress. Industrial warehouse assets had the most compression in cap rates across all sectors for Q3. Although lease terms for single tenant industrial properties tend to be shorter than other property types, investors place their bets on high credit tenants remaining in place.
Despite the cost of capital in the market, there are a lot of cash-flush players needing to deploy capital by the end of the year. Many of these buyers are on the clock for exchanging their 1031 assets, while others are funds that haven’t fully deployed the capital they raised for 2022. Many buyers will want to close on properties that qualify for 100% bonus depreciation before the deadline of December 31, 2022. With so much uncertainty surrounding the economy and net lease market heading into 2023, we expect to see increased activity for the rest of the year. With the uptick in deals expected, it’s still a great time to be a seller.