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A new year in 2021, or more of the same?
The last 12 months have been full of surprises and changes, but the single-tenant net lease market remained, for the most part, quite resilient. Overall, the sector beat predictions, which estimated net lease sales volume would be lucky to reach $50.0 billion on the year. Instead, significant pent-up demand led to a tremendous fourth quarter of activity – the fifth strongest in history – and with more than $20.5 billion in investment sales reported in the last three months, net lease volume surpassed $60.0 billion on the year.
Cap rates, in addition to investment totals, delivered a bit of a surprise in late 2020 with all three property sectors – office, industrial and retail – reporting slight increases quarter-to-quarter. While the market has been at or near the bottom for quite some time, further cap rate compression was expected in the near term. Industrial cap rates, for example, after finishing third quarter 2020 at an average of 6.02 percent, were projected to possibly dip into the five-percent-range. Instead, industrial rates ended the year at 6.10 percent, with retail rates increasing by two basis points quarter-to-quarter to reach 6.18 percent, and the office sector reporting a seven-basis-point jump to 6.34 percent.
Have we officially hit the bottom for cap rate trends? And how likely is investment momentum to carry over to 2021? By studying what’s currently offered for sale, particularly focusing on those assets that are most likely to actually transact, there’s a good chance fourth quarter’s cap rate uptick was temporary. For the industrial and retail sectors, cap rates are likely to compress further or at least stay stagnant over the next several quarters, while office remains a bit more of a question mark. High quality medical assets and sale leaseback activity may help keep office cap rates from rising drastically in the coming months, although the gap in average rates is expected to widen when compared to industrial and retail averages.
Investor demand and how that translates to sales volume in 2021 remains the biggest unknown. Will the pent-up demand witnessed in fourth quarter translate to a strong first quarter as well? Will essential retail assets and industrial facilities continue to receive the highest attention from investors? Will private buyers hold their market share dominance across the net lease sector, or will they see increased competition from other investor types? We’ll be watching these trends closely over the next 12 months to see if 2021 will be another year of surprises.