Q4 2022 Net Lease Cap Rate Report

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12/06/2022 By B+E

B+E Q4 2022 Net Lease Cap Rate Report

Q4 2022 Summary:

Uncertainty prevails in Q4 2022 as market conditions continue to shift due in part to high levels of inflation and rising interest rates.

Inflation has remained a hot topic through Q4, despite showing recent signs of cooling. The Labor Bureau published an inflation increase of 7.7% year-over-year in October, compared to the 40-year high of 9.1% in June. Although inflation rates are seemingly recovering, they are still far above the Federal Reserve’s benchmark target rate of 2%. After four straight 75-bps rate hikes in 2022, Fed policymakers have indicated that it may soon be appropriate to move to a slower pace of short-term borrowing rate hikes. While October’s CPI data offered some relief, Bloomberg economists expect that the Federal Reserve’s benchmark interest rate will likely reach 4.75% to 5.00% in Q1 2023 in order to further curb inflation.

Higher borrowing costs combined with conservative underwriting has resulted in a lower loan closing volume across asset types. The Mortgage Bankers Association trade group reported a 13% decrease in loan originations for the third quarter of 2022 from year-earlier levels. The report states there has been a 44% decrease in office loans, a 6% decrease in retail loans, and a 4% decrease in industrial loans. However, due to the recession-proof nature of healthcare, the asset type went against the grain with a surplus in demand and a 61% increase in loan origination from year-earlier.

Quarter-to-quarter, supply has skyrocketed with an increase of 138.9% more properties on-market in the STNL sector. Sellers are rushing to the market in hopes of capturing the wave of record-low cap rates. Q4 2022 shows the first stagnation of cap rates that the industry has seen in the trailing two years, assumed to have hit their lowest point.

Simultaneously, as supply grows, demand has begun to weaken. The Fed’s increasing rates have pushed many levered buyers out of the market, with current cap rates producing negative leverage. According to CoStar, buyers in the first half of 2022 consisted of 51% private levered buyers and 33% institutional cash buyers in the STNL market. Over the latter half of 2022, the buyer pool has shifted to a makeup of 35% private buyers and 50% institutional buyers. B+E predicts a strong finish to Q4, as the supply will be consumed by all-cash investors looking to deploy the rest of the capital they’ve raised prior to the start of the new year.