Net Lease Cap Rates Enter New Phase Amid Rising Investor Demand
A shift in net lease cap rates is unfolding as private investors drive a brisk rebound in transaction activity, marked by a heightened focus on tenant credit and lease structure. Over the past year, the market for single-tenant net-lease properties—often favored for their simple management and stable cash flow—has entered a new phase, with investors recalibrating pricing strategies to reflect a more discerning approach to risk.
John Chang, Senior Vice President and National Director of Research Services at Marcus & Millichap, points to changing dynamics in cap rate tiering, drawing a sharp line between high-credit and lower-credit tenants. Properties leased to high-tier credit tenants have seen cap rates drop into the mid-5% range, while those with mid-tier credit have edged up toward the high 6% range. Holdings backed by lower-credit tenants now command cap rates of 7%, underscoring investor wariness and a premium on credit quality in the current cycle.
Lease duration is turning into another critical determinant, according to Chang. “Properties with less than five years remaining have been trading with cap rates in the 7.7% range,” he said in a company video, while assets with five to fifteen years left are averaging a cap rate of 6.8%. This bifurcation extends to longer-term leases, where the average cap rate lands at 6.1%, highlighting clear price segmentation in a maturing sector.
Transaction velocity for net-lease assets is accelerating, with private investors accounting for 64% of purchases over the last year. Activity soared 18% over 2024 levels and sits a full 43% above the pre-pandemic average from 2014 to 2019. The latest 12 months ended with the third-highest annual transaction volume on record, trailing only the frenzied pace set in 2021 and 2022.
Chang credits renewed interest in single-tenant net lease properties to recent changes in bonus depreciation rules, which permanently codified 100% bonus depreciation and reignited demand for asset classes such as car washes, convenience stores, and auto service centers.
As institutions and REITs pare back participation in this space, private buyers have found a new footing, using the market’s risk tiering and lease structures to guide acquisition and disposition strategies. Factors such as property location, asset age, lease bumps, and renewal options continue to influence cap rate dispersion, but the underlying driver remains investor appetite for simplicity, stability, and strategic tax planning.
Source: GlobeSt/ALM