In what has become a long-term trend, cap rates in the single-tenant net-lease sector continued to rise in the first three months of the year, marking the 12th consecutive quarter in which cap rates increased for this key commercial sector.

That’s one of the big takeaways from the first quarter Net Lease Market Report released April 7 by The Boulder Group.

According to The Boulder Group’s research, overall cap rates in the single-tenant net-lease sector rose to 6.78%, a modest jump of two basis points from the fourth quarter of 2024.

 Single-tenant cap rates increased to 6.56% for retail assets, a jump of four basis points from the fourth quarter of last year; 7.80% for office properties, which represented an increase of two basis points since the fourth quarter of 2024; and 7.23% for industrial. That industrial cap rate was unchanged from the last quarter of 2024.

Randy Blankstein, president of The Boulder Group, a national net lease CRE firm with offices in Wilmette, Illinois, and Denver, said that the most recent increase in cap rates should not have been a surprise to anyone following this sector.

And the reason behind these cap rate jumps shouldn’t be a surprise, either. It’s all about how expensive it is to borrow money today.

“The persistent upward trend in net lease cap rates now spans three years,” Blankstein, said in a statement. “This is reflective of sustained high borrowing costs and inflationary pressures.”

The number of net-lease properties rose in the first quarter, too, according to The Boulder Group’s research.

The net-lease report said that property supply in the single-tenant sector increased by more than 5% when compared to the prior quarter. This, too, is a trend: During the past two years, the supply of net-lease properties has surged by nearly 30%.

The reason behind this? The Boulder Group points to a slowdown in transaction speed and a pricing gap that still exists between buyers and sellers.

The increase in supply, though, isn’t hitting all net-lease sectors the same.

“Of all the net lease sub-sectors, the drug store sector is experiencing the slowest transaction volume and a glut of supply,” said Jimmy Goodman, partner with The Boulder Group, in a statement.

Recent news regarding private equity company Sycamore Partners’ acquisition of Walgreens further compounded the slowdown in sales activity in the drug store category, The Boulder Group reported.

Uncertainty over Sycamore’s long-term strategy has deepened the sub-sector’s supply and slowed deal flow. Not surprisingly, cap rates in the drug store sector increased by 44 basis points from the last quarter of 2024 to the first of this year.

Higher interest rates, as they have with all CRE sectors, have also impacted net-lease sales activity.

According to The Boulder Group, the net-lease market continues to adjust to the higher interest-rate environment experienced in recent years. Transaction volume increased in the fourth quarter of last year, and The Boulder Group is predicting a slight uptick in sales volume in 2025.

There is still caution, though. The Boulder Group said that investors will be carefully monitoring the capital markets following the Federal Reserve Board’s decision to hold interest rates steady during their March meeting.

If short-term rates continue to drop in the near term and uncertainty remains in the overall financial markets, net-lease activity is expected to increase, said The Boulder Group. But the CRE firm says that even with an increase, activity in this sector won’t rise close to the heights in pricing or transaction volume that it saw during the peak times of 2020 and 2021.