Net Lease Real Estate
As of the third quarter of 2020, the trailing 12-month U.S. single-tenant transaction volume totaled $56 billion, according to Real Capital Analytics (RCA). In the first quarter of 2020, COVID-19’s impact on volume was minimal; however, the impact was clear in the second and third quarters, with volumes down 15% and 21%, respectively, compared to the prior quarters. The two-quarter decline is most pronounced in office and retail, which are both down approximately 35%, while industrial volume is down 29%. The last time total volume was $56 billion was in the first quarter of 2015. The decline could be attributable to a number of factors, including properties being closed, uncertain sellers, a lack of clarity in the debt markets, and a pricing disconnect between sellers and buyers. As businesses reopen and there is more clarity on tenants’ operations, sellers may have more confidence in bringing properties to market.
Although single-tenant volume has decreased in 2020, net lease properties represented 20% of total commercial real estate investment volume in the second quarter, as compared to 13% in the first quarter of the year, according to CBRE. While there have been large fluctuations in volume, cap rates have remained far more stable, with mild compression in the past two quarters. As interest rates declined and cap rates remained stable, the spread between average cap rates and the 10-year Treasury rate has widened to the highest level since 2012.
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Retail and office cap rates have remained largely flat, while industrial cap rates compressed.
After growing substantially for most of 2019, single-tenant volume declined in Q2 and Q3 2020.
The spread between average cap rates and the 10-year Treasury rate has increased.