Higher interest rates continue to slow the number of investment sales in the net lease sector. And this trend won’t change until the Federal Reserve Board finally begins lowering its benchmark interest rate.

That’s one of the big takeaways from The Boulder Group’s 1^st Quarter Net Lease Research Report that the brokerage released in early April.

According to The Boulder Group’s report, cap rates in the single-tenant net lease sector increased for the eighth consecutive quarter within all three major net lease sectors in the first quarter of 2024.

And where do these cap rates stand as of the end of the first quarter? Single-tenant cap rates increased to 6.42%, a jump of seven basis points, for retail; 7.60%, or five basis points, for office; and 7.02%, two basis points, for industrial.

“Cap rates in the first quarter of 2024 represented the highest levels since 2014 for single-tenant retail properties” said Randy Blankstein, president of Wilmette, Illinois-based The Boulder Group. “However, cap rates for single-tenant retail and industrial assets remain lower than their 20-year historical average by approximately 40 basis points.”

Like all commercial brokers, those specializing in net lease brokerage are waiting anxiously for the Federal Reserve Board to lower its benchmark interest rate. This hasn’t happened yet. And until it does? Don’t expect sales activity in the net lease space to rise significantly.

“Elevated interest rates continue to impact transaction volume, which is lower than prior years” said Jimmy Goodman, partner with The Boulder Group. “A lack of 1031 exchange buyer activity is resulting in an increased supply of net lease properties on the market.”

The slowdown in net lease sales has resulted in an increase in available properties. The Boulder Group reported that property supply in the single-tenant sector increased by more than 9% in the first quarter of 2024 when compared to the last quarter of 2023. With limited transactions occurring, properties continue to be added to and remain on the market, according to The Boulder Group’s report.

Despite the headwinds in the market, certain sellers including merchant builders or owners with upcoming loan maturities, look to meet market pricing.

“Net lease retail properties with the largest supply — dollar stores and drug stores –continue to experience the greatest cap rate expansion,” said John Feeney, senior vice president with The Boulder Group. “Both of these sectors experienced double-digit cap-rate expansion in the first quarter of 2024.”

After multiple Federal Reserve meetings without any interest rate relief, investors will be monitoring upcoming rhetoric from the members of the Federal Reserve, the Boulder Group said.

As the company’s report says, any cuts to interest rates would be welcomed by net lease owners looking to refinance or sell properties before the end of the year.

There is hope, too, that sales activity will increase in the next six months. The Boulder Group said that with the stability now in the capital markets, the expectation from market participants is for increased transaction volume in the second half of 2024.

However, an increase in transaction volume without a cut in interest rates? It would be a small increase, not anywhere near a surge, with The Boulder Group predicting that net lease transactions are not expected to end 2024 anywhere near the amount of activity the sector saw in prior peak markets. Including recent ones in 2020 and 2021.

By understanding the needs and preferences of the typical U.S. consumer, the most successful retail brands have evolved to deliver on these expectations. Today, significant expansion is underway across several diverse retail sectors including automotive, discount and dollar stores, fitness and sporting goods, and, of course, the dynamic restaurant industry.

While expansion in these categories isn’t necessarily a new trend, there have been some recent announcements that promise to contribute even more substantial growth than originally anticipated. Conversely, a handful of retailers have also announced consolidation strategies that could present some challenges in the coming months and years.

Announcements from these retailers aren’t just headlines though. Developers, potential investors, and current owners rely on these plans to help form their own strategies, drive investment decisions, and identify both obstacles and opportunities across the market.

U.S. consumers love a bargain

The allure of a great deal resonates deeply with most U.S. consumers, and many retailers cater to this preference by offering coupons, discounts through loyalty programs, or even structuring their entire concept around discounted merchandise.

In recent years, escalating inflation has caused consumers to cut back on discretionary spending, and shoppers are now pinching pennies on even the most essential goods and services. Not surprisingly, retailers that cater to the cost-conscious consumer are some of the brands growing the fastest.

• Dollar General recently reached 20,000 total locations and is planning an additional 800 new stores in fiscal year 2024.
• ALDI successfully acquired Southeastern Grocers and will add 800 total locations to its footprint through new development and rebranding by year-end 2028.
• In April, Target will launch a new fee-based membership loyalty program, presumably to compete with Walmart+ and Amazon Prime, and in recent months it announced its intent to continue exploring large format new store development, which contradicts the downsizing trend we’ve seen across other brands.
• Five Below plans to exceed last year’s growth by opening up to 235 new locations during fiscal year 2024, putting the discount brand on target to reach its goal of 3,500 total stores by 2030.

U.S. consumers value convenience

Convenience remains a cornerstone of the consumer experience, but convenience extends beyond just products. It encompasses ease of access, swift service, and helpful technology among other characteristics.

From one-stop shopping destinations to grab-and-go offerings, retailers that promise a speedy and efficient experience are gaining market share as brand loyalty rises. The availability of self-checkout kiosks, mobile apps that allow ordering on the go, and multiple drive-thru lanes to ensure quick service all combine to deliver a convenient experience that consumers crave, which is helping to drive not only growth across the sector but additional innovation, too.

• Sheetz & Wawa: More than 1,000 locations are planned long-term by these two rapidly growing gas station and convenience store brands.
• Take 5 Oil Change, the “stay in your car” oil change pioneer, embodies convenience and speed, and recent growth has taken the brand beyond 1,000 locations, with long-term plans calling for 150 new locations to open each year.
• In the growing “medtail” space, Aspen Dental has emerged as a provider of choice, offering appointments and locations that are more convenient for some patients than a traditional dentist can offer.
• Chipotle Mexican Grill & Chick-fil-A: Both brands have embraced unique drive thru concepts, relying on mobile ordering and multiple pick-up lanes. It’s estimated that more than 80% of all new Chipotle stores will feature Chipotlanes, while nearly all Chick-fil-A stores will include a double or triple lane drive-thru to accommodate high volumes.

U.S. consumers are investing in their well-being

Following the pandemic, consumers have increasingly been focused on personal wellness, and this has become a driver of growth for retail brands offering health-centric goods and experiences. From fitness centers promoting active lifestyles to grocery stores and restaurants offering organic and healthy food options, consumers are actively seeking out brands that align with their goals and preferences.

According to McKinsey & Company, the U.S. wellness market has reached $480 billion and is growing at a rate of 5 to 10% each year. Retailers who deliver health-conscious goods and services are capitalizing on this growth and many are looking to expand in the coming year and beyond.

• Built on a reputation of being a “judgement-free zone,” Planet Fitness has seen tremendous growth in recent years, and expects to add another 600 locations globally in the next three years to reach a total of 5,000 club locations.
• With up to 140 new stores planned in the next few years, Academy Sports + Outdoors sees an opportunity for significant expansion as it works to capture market share from primary competitors in this growing space.
• While not the fastest growing grocery concept, specialty brand Sprouts Farmers Market has a target demographic that values healthy and fresh offerings, and they expect to reach a broader consumer base by opening 35 new stores in 2024.

For more information about these retailers and other top brands, read Northmarq’s Q1 2024 Top 100: Tenant Expansion Trends report.

Lanie Beck is senior director of content and marketing research at Northmarq.

Embracing innovation, sustainability and community engagement remains paramount as Texas’s commercial real estate landscape evolves, something. The Beck Group knows well. With a diverse portfolio spanning the United States, Mexico and internationally, Beck continues to redefine industry standards. Matt Leyman, regional director of Beck’s Dallas office, offered his insight into how his firm is addressing client and market demands. Fluctuating interest rates have significantly influenced private- and commercial-sector projects, particularly in office and multifamily spaces. Developers, Leyman said, are being challenged to initiate projects, with pre-leasing becoming a prerequisite for commencement. Uncertainty looms over the office market as organizations reassess workspace needs. Despite a shrinking private market, the public sector remains robust, with project for local entities and data centers driving demand.

“The Beck Group has initiated measures to mitigate this problem by increasing job-site efficiency and productivity, which benefits everyone, including our trade partners,” shared Leyman. “This approach involves integrating deeper into supply chains, creating cost benefits, and improving fabrication/production efficiencies.” Clients, he added, are embracing the design-build delivery method, Beck’s specialty. “Design-Build is the teaming of two separate design and construction firms in a formal agreement or, in our case, contracting with fully integrated firms like Beck,” Leyman explained. For example, Texas Health Huguley commissioned Beck’s design tea to plan and assess a new patient tower for its campus. Then Beck’s construction team successfully completed a six-story patient bed tower featuring a ground floor with a new public lobby and administrative spaces, a women’s services floor and three additional levels that house med/surg units with 36 inpatient beds per floor. Reflecting changes in healthcare standards, the new facility’s rooms are nearly double the size of the original private patient rooms, providing ample space for equipment and visiting family members. Leyman also highlighted surging demand for sustainable building materials, driven by regulatory standards, consumer preferences and environmental consciousness. This shift towards eco-friendly materials aligns with Beck’s green building initiatives and underscores the firm’s commitment to durability and cost-effectiveness. “At Beck, we implement sustainable building materials, evaluate construction activities that reduce emissions and develop corporate strategies that set us apart from our peers in design and construction,” said Leyman. The trend towards adaptive reuse and repurposing of existing buildings also reflects Beck’s commitment to sustainability and urban revitalization. “High-rise towers are becoming a mix of product types with retail, office, multifamily and hotel constructed in a vertically stacked design,” Leyman said. This approach minimizes environmental impact, reduces resource consumption and contributes to neighborhood preservation. “We are developing strategies and workflows to consider the total life span of buildings. A material’s durability, long-term maintenance, future adaptability, eventual building demolition and material recyclability are taking priority,” said Leyman. “Our team is also future-proofing buildings by designing and building with flexible layouts, movable or demountable partitions and prefabricated components. We’re incorporating strategies for technological advancements. We also prioritize energy efficiency and try to understand climate threats better so that buildings can withstand extreme conditions.” At the Old Parkland West Campus in Dallas, Beck’s design and construction teams helped Crow Family Holdings bring its vision of a new headquarters to life by redeveloping the neglected historic hospital into a stunning Class A-plus office campus. Beck is currently working on the West Overlook of Trinity Park Conservancy’s longawaited 250-acre Harold Simmons Park just west of downtown Dallas. The former industrial site had an existing long shed, which was incorporated into the design, along with an event lawn, café, skate and bike park, water features, play cove with a cable ferry, six two story interactive towers and more.

Another trend Leyman has witnessed in commercial property design is an emphasis on wellness and employee well-being. Projects are increasingly focused on providing amenities and experiences akin to luxury hotels, fostering vibrant and inspiring environments. “Live-work-play concepts are dominating the place-making effort. One example is the office environment. Office buildings are shifting to a service- and amenities-focused competition in response to those who generally want to experience vibrant, comfortable, and inspiring environments. Also, developers are repurposing old office spaces into multi-family,” Leyman said. “The new office model is increasingly focused on mixed-use, offering a combination of retail, outdoor space and place-making, hospitality and multi-family.” He pointed out that higher mortgage rates and the rising cost of homeownership are forcing younger generations into the rental market earlier in their careers. Additionally, Leyman added, many younger people working in urban areas are shunning renting in the suburbs, opting to live in amenities-focused apartments closer to work. Meantime, Leyman said technological advancements are reshaping construction methodologies, enhancing efficiency, safety and quality assurance. From sophisticated quantity take-off tools to safety applications utilizing photo recognition, he said the industry is witnessing a paradigm shift and Beck is adapting as needed. “Our team is continually developing and honing in on the most efficient applications,” Leyman said. “There are innovations in on-site or nearsite fabrication technologies. These relatively new applications would benefit prefabrication without the challenges associated with full modular factory prefabrication.” Beck’s imprint on the built environment will be a lasting one, created via a holistic approach to construction that incorporates collaboration, diversity and education initiatives.

Vision Commercial Real Estate vice president Barrett England completed a purchase and several lease negotiations at 1005 N. Saginaw Blvd., in Saginaw, Texas.

England assisted developer Blazing Hospitality in the purchase of a .98-acre tract that was home to a run-down metal building. The developer worked with the city to take advantage of a Chapter 380 Economic Development Agreement to aid with the demolition of the previous building to make way for a new 8,000-square-foot commercial strip that is already leased to several new tenants. Construction is expected to be completed in early Q3 2024.

After the purchase, Vision Commercial’s England and  Director Jack Sclafani took over leasing efforts and quickly inked deals with Tim Hortons Coffee, Bakery, and Café, Firehouse Subs and LiquorLand. There’s one opportunity left to join these name brand tenants in an in-line, 1,250 SF space.

In lease negotiations, Kendall Graff with Woodmont represented Firehouse Subs. Tim Hortons was represented by Max Keffer and Alden Harris of SHOP Companies.

Cushman & Wakefieldrepresented Shoo Loong Kan, a Singapore-based restaurant group specializing in Chongqing/Sichuan hot pot cuisine, in its lease at West on West shopping center in Houston and at Carrollton Town Center in Carrollton, Texas.

In Houston, Shoo Loong Kan plans to open its 6,213-square-foot space at West on West, 12220 Westheimer Road, the restaurant’s first Texas location, and will follow with a 6,330-square-foot Carrollton restaurant.

Cushman & Wakefield’s Michael Pittman II, Michael Burgower, and Rachel Granstrom represented Shoo Loong Kan in lease negotiations with West on West owner NewQuest Properties, which also owns the Carrollton location.

Adolfson & Peterson Construction completed two projects with the University of North Texas in Denton, Texas.

The Jazz Lab renovation included updating 3,932 square feet of space within the Music Building. The project encompassed acoustical performance improvements, interior renovations, the addition of instructional technology with recording/webcasting capabilities and new furnishings, along with HVAC and ADA compliance modifications. The area serves as rehearsal space for the university’s nine jazz lab bands, including the seven-time Grammy-nominated One O’Clock Lab Band®, as well as four vocal jazz ensembles.

AP also constructed UNT’s Advanced Air Mobility (UAAM) Test Center, a 120′ length x 300′ width x 80′ height netted facility supporting research in unmanned air systems and ground autonomous vehicles. A contained facility, the Air Mobility Lab creates all-weather conditions with full FAA compliance, enabling testing and analysis of Unmanned Aircraft Vehicle (UAV) physical robustness and safety criteria including hard-ground impact, collisions, and effects of high-speed maneuvers on flight dynamics and controls.

This facility is part of UNT’s Center for Integrated Intelligent Mobility Systems (CIIMS), which was established in 2020. CIIMS brings together various expertise, including engineering and business, around intelligent mobility, such as autonomous flight, ground vehicles and the systems that enable their deployment.

Smith Group is the Music Lab project architect, while Walter P Moore serves as the architect for the Air Mobility Lab.