While institutional deployment may increase, private investors will continue to favor the NNN sector, due to low entry prices and investment grade tenants’ ability to withstand market cycle volatility. Importantly, investors continue to deploy capital into net lease assets as an alternative to fixed income assets, for incremental returns. Even though transaction volumes in retail NNN broadly are down, and commercial mortgage rates continue to escalate due to rising treasury yields, triple net lease cap rates are not significantly affected – studies show nationwide cap rates on average increasing only 1% over 2022 to a 6% level in mid-2023! Average NNN lease terms are also unchanged at 13 years. (NNN lease terms) The Fed’s interest rate hikes and the resultant global market uncertainty leaves NNN assets relatively unscathed, which fact continues to drive capital into triple net lease assets.
Of all the investment-grade national tenants whose cap rates are rock solid, despite market turmoil and inflation, Taco Bell leads the way, followed by 7-11 and CVS. Starbucks and Chic-filet also continue retain their value. In contrast, Autozone and Walgreens have seen the largest increases in cap rates – up almost 1% over last year.
Looking at the bigger picture, national studies indicate that three broad niches within retail NNN are doing particularly well in these turbulent times, namely quick service restaurants, pharmacy and convenience stores. The cap rate successes of individual national net lease tenants mentioned prior validates the broader success of each of these niches. So, on average, convenience stores and pharmacy sectors had cap rates remain steady at around 5.8% cap, while quick service restaurants’ cap rates ticked up just a bit to slightly over 5% cap. Not surprisingly, these three niches remain the go-to for investors and capital continues to flow into these sectors despite macro-economic headwinds. All this makes for interesting comparison to 10-year treasury yields, which have been hovering over 4.6% at time of writing.
Charting uncertain economies is a specialty of Robert Gamzeh and the team at the Triple Net Investment Group. Over multiple decades consisting of a variety of market cycles, Robert and his team continue to guide NNN investors safely, securely and profitably into net lease assets, which will generate wealth and meet your 1031 objectives.
Get to know us with a complimentary consultation by calling today, 202-361-3050.
