Today’s post is written by Michael Green, Senior Commercial Loan Originator with Counsel Mortgage Group, LLC.  Mike writes monthly on the commercial mortgage market.  Check back each month for his commentary.   

In Q3-24, for the 10th consecutive quarter, cap rates for single-tenant net lease (STNL) properties increased quarter-over-quarter in retail, office, and industrial. The blended cap rate increase was 3 bps (basis points) (6.70% to 6.73%). It shows that the biggest contributor to average cap rates came from retail.

The primary reason for the long-standing increase in cap rates was relatively high interest rates in the market. Additionally, a shortage of transactions over time – also hindered by interest rates – contributed to excess inventory.

Net lease investors hope the 50 bps rate cut by the Federal Reserve will boost transaction activity and improve cap rates in their favor. Early market data since the rate decrease indicates most market participants remain cautious. That singular event seems overshadowed by escalating geo-political conflicts and speculation about our own election.

In retail, the drugstore sector was up by 17 bps. Rite Aid stayed flat. CVS saw a 10 bp gain, and Walgreens, a 25 bps jump.

We highlight the drugstore sector here to note the latest announcement that Walgreens Boots Alliance will close about 1,200 stores over the next 3 years, with 500 to be shuttered in 2025. Add to this CVS is closing 900 stores, and Rite-Aid plans to close 500.

The total of drugstore closures next year will likely bring an excess supply of STNL properties to market, upsetting the supply:demand balance not just of drugstores in the STNL space, but in the broader retail STNL category. The new imbalance should favor buyers – if that’s you, get ready.