Transcript

(upbeat music) - Hey, everyone. We have a new report coming out on this, but I figured I'd give you all a sneak peek into some new proprietary insights on single-tenant net lease cap rate trends. Now, single-tenant net lease properties are particularly popular with investors who want to capitalize on some unique advantages of commercial real estate investment, but who don't want to take on the management responsibilities often associated with real estate investments. In a triple net lease, the tenant generally pays the property taxes, the building insurance, and takes care of the property maintenance. And the owner generally covers cost related to the structure like the roof and long-term components like the HVAC system. In recent years, single-tenant net lease properties, like car washes, convenience stores, quick-service restaurants, and auto service centers have become increasingly popular with investors. A key reason has been their high proportion of equipment and site improvements that qualify for 100% bonus depreciation. In 2023 and 2024, when bonus depreciation was stepping down to 80%, then 60%, some of these benefits were diminished, but the recently passed tax rules make 100% bonus depreciation permanent. So, these types of properties are being favored once again. Because of their minimal management requirements, single-tenant net lease properties are frequently purchased by investors who wanna reposition out of more management-intensive properties, like apartments or single-family rentals. These investors frequently leverage 1031 exchanges in these transactions, so they can roll their adjusted basis into the replacement property and defer taxes on any gains and on the depreciation they've already taken on the property they sold. And with a single-tenant net lease property, owners have less operating and maintenance responsibilities and expenses. The owner then collects the monthly lease payment from their one and only tenant at the new single-tenant net lease property. Because there's just one tenant, their creditworthiness becomes particularly important, and the cap rates on single-tenant net lease properties often vary, depending on the credit of the tenant. In the past year, the tenant's credit rating has become even more important. The cap rates on high-tier credit tenants have trended lower to the mid 5% range, while the cap rates on mid-tier credit tenants has risen modestly to the high 6% range, and the cap rate on lower tier credit-rated tenants have been trading in the 7% range. Another factor driving cap rates is the term remaining on the lease. On average, properties with less than five years remaining have been trading with cap rates in the 7.7% range. Properties with five to 15 years of lease term have averaged 6.8%, and properties with lease terms of 15 or more years have averaged 6.1% cap rates. There are a lot of other factors, such as the property location, how old the property is, whether the asset has periodic lease bumps, whether the operator has additional lease options to extend and so on. So the values of single-tenant net lease assets can vary dramatically, but over the last 12 months, many investors have focused on these assets and transaction velocity has climbed 18% compared to 2024 and 43% above the 2014 to 2019 average. The last 12 months ending with the third quarter generated the third highest annual transaction activity on record behind 2021 and 2022 when commercial real estate sales activity surged. While some institutions and REITs are active in the space, their activity has diminished in recent years. Single-tenant net lease acquisitions have historically been dominated by private investors who drove 64% of the purchase activity in the last year. And many of these investors have leveraged 1031 exchanges to exit more management-intensive commercial real estate as part of their retirement and estate planning processes. Now, you should check with your tax advisor regarding the use of 1031 exchanges, but migrating a portfolio for more management-intensive properties into easier-to-operate single-tenant net lease assets while deferring capital gains and the recapture of depreciation can be a great way to scale down the management needs of a real estate portfolio. This is just one more commercial real estate strategy for investors who keep their eyes on the horizon. (upbeat music)