Headwinds are mounting for the single-tenant internet lease sector after a robust first half of 2022.
The STNL area noticed a document $40.1 billion in funding gross sales in H1 2022, 12% above the identical interval in 2021 (additionally a earlier document) — however analysis from Colliers reveals that the tempo of gross sales is slowing, with quantity within the second quarter falling 35% from Q1 and 17% year-over-year. Deal rely was additionally down 42% year-over-year within the second quarter.
“Rising rates of interest have made transactions more difficult to finish, significantly for the non-public proprietor reliant on debt,” the Colliers report notes. “Predictable money circulate has been crucial within the STNL area. Whereas that’s nonetheless the case, modest hire will increase constructed into lease buildings are much less interesting to in the present day’s traders, due to cussed inflation. Likewise, the price of debt has elevated, so non-cash consumers are asking for value reductions that some homeowners are unwilling to simply accept. This dynamic has prompted the market to indicate indicators of peaking.”
The four-quarter shifting quantity clocked in at $108 billion, a slight decline from Q1’s document tempo of $111 billion.
“Whereas long-term leased property should not as enticing as they had been just some quarters in the past, that is seemingly a blip and never a sustainable market state of affairs,” in keeping with Colliers analysts. “Forecasts for inflation predict that in the present day’s ranges will ease within the quarters forward, permitting the market to return to regular, albeit with greater curiosity charges than seen in 2021. As we speak, traders are centered on their skill to get to the lease roll rapidly, significantly on the economic aspect, the place hire development has been robust.
Analysts from JLL have famous some “real-time pricing discovery“ underway out there, with offers repricing versus peak values as price hikes mount.
“Buyers are ‘stress-testing’ primarily based on future price will increase and the potential for a recession,” the JLL report notes. Debt markets are additionally unstable and posting upward pricing strain throughout property.
Colliers notes that 1031 alternate consumers are nonetheless a “driving pressure” behind the sector’s success. Non-public fairness has additionally raised billions to deploy within the area. And on a sector-by-sector foundation, the story varies.
For the economic sector, traders seem centered on short-term leased or multi-tenant property, a developments Colliers says will seemingly be momentary as traders purchase property with adverse leverage for a short while to acclimate to market circumstances. The sector noticed record-breaking quantity within the first half of the 12 months, however the gross sales tempo fell sharply within the second quarter and was off 32% over Q1. Colliers analysts additionally count on that quantity will gradual much more within the third quarter. Cap charges have additionally confirmed indicators of upward strain and clocked in at 5.1% within the first half of the 12 months.
“Industrial is in a novel state of affairs. Fundamentals stay phenomenal with insatiable tenant demand and rising rents,” the Colliers report notes. “Nonetheless, single-tenant transactions, significantly with time period, are at present out of favor. Buyers are all for attending to the hire roll rapidly.”
The workplace sector is slumping, with first half quantity hitting $12 billion and second quarter quantity down 50% over Q1. Offers within the first half had been down 25% over 2021 and pricing continues to rise. Median cap charges had been 5.9% for H1 2022.
“Provided that the standard workplace lease construction has annual hire bumps effectively beneath present inflation ranges, some traders are taking a wait-and-see strategy. In consequence, quantity and total deal exercise have cooled,” the Colliers report notes. “Like industrial, long-term leased property are quickly out of favor, though we don’t count on this to final. As inflation eases, investor curiosity ought to rebound.”
Cross-border capital exercise has “all however ceased” for workplace as effectively, accounting for simply 1.7% of exercise by way of Q2. REIT exercise has fallen from 13% to six.9% as effectively, bu institutional and personal capital sources have been internet consumers.
Retail was a “blended bag,” with gross sales quantity on observe to match or exceed 2021 however quantity in Q2 down 20% 12 months over 12 months and transactions down 50% in the identical interval.
“The common value per deal is up now that traders are concentrating on higher-quality property and areas,” the Colliers report states. “Cap charges fell within the first half, with almost all motion occurring in Q2. That is seemingly unsustainable, significantly for the highest quartile of offers, which noticed cap charges fall to 4.8%.”
Consumers for retail STNL had been predominantly institutional and REITs, whereas cross-border and personal traders have been internet sellers.
“Buyers are nonetheless drawn to STNL retail properties,” the report notes. “Pricing will seemingly modify within the months forward as a bid-ask unfold has emerged throughout the broader market. As inflation reveals indicators of easing, capital ought to pour into STNL property once more.”
