Investors flocked to the single-tenant net lease space en masse in the third quarter, with the sector registering record deal flow despite mounting economic headwinds.
Sales activity for net-leased retail rose between 24% to 27% across the 12-month span ending in June, as record rents approached historic highs and vacancy remained below pre-pandemic numbers, according to Marcus & Millichap data.
“Moving forward, investors seeking long-term cash flow may capitalize on high pricing in other sectors and move equity via 1031 exchanges into less management intensive single-tenant properties,” firm analysts note in a new report. “Yield-focused buyers may target Midwest markets with increased frequency, as Detroit, Chicago, Kansas City, Cleveland, Indianapolis, Milwaukee and Minneapolis are home to average returns 30 basis points to 80 basis points above the national mean.”
Marcus & Millichap analysts say midsize markets offer upside, with vacancy reaching historic lows and 11 cities mainly in the Mountain region and Florida posting year-over-year deal flow improvements exceeding 25 percent. Phoenix recorded the fifth-largest single-tenant transaction total across all U.S. retail markets, and Tampa had the most closings among Florida markets.
Among secondary markets, prices are up the most year over year in St. Louis, Cleveland, Charlotte, Nashville, and San Diego.
Retailers are also growing their reach as core spending ticks up, with the amount of store openings more than doubling the number of closures during the first seven months of this year, especially among off-price retail, discount store, home décor and supermarket expansions. And “the historically low volume of single-tenant space delivered during this span required many of these retailers to occupy existing properties, a boon for single-tenant vacancy and marketed rent advancement,” the report notes.