Triple-Net Listings Are Up, According to Northmarq

Article originally posted on Globe St. on April 24, 2024

But don’t stand by trends, as flat average caps hide the volatility.

The April letter about triple-net lease from Northmarq’s Chris Lomuto shows, as he put it, a “mixed bag of results.”

Top observation is that the average closing cap rate for the month ending March 31, 2024, was about 6.60%, or roughly 95 basis points up from the depths of July 2022. It’s also down nearly 20 basis points from December 2023.

But the evening out bears the classic problem of looking at averages rather than data distributions. As Lomuto noted, the deals with higher closing caps had offset those with lower closing caps.

“What does that mean for pricing on a given deal?” he wrote. “The truth is whether you’re buying or selling right now, you really have to look at each deal individually and compare it to what else is on the market, to understand what kind of pricing may be possible.”

Looking at 60-day ranges to account for reporting delays, January 2024 looked roughly the same as January 2023. But the surrounding data doesn’t. December 2023 looked “fairly anemic” compared to the previous two years. Looking at a graph of data, swings (measures of volatility) and amplitude (measures of activity) have been compressing for several years. That raises the question of what the coming year might look like in comparison.

Average asking cap rates were roughly back to where they were in February 2020, before all hell broke loose. That’s 102 basis points above the low of May 2022.

Lomuto also noted a needed shift in perspective in measuring triple net lease against other metrics, particularly against the S&P 500, which is important if you want to understand where investors might prefer to focus. He said that “while stock prices have clearly risen relative to trailing earnings, companies like NVIDIA are being bid up on expected future earnings.”

Instead of using equities as a reasonable comparable, treasuries and borrowing rates might be more apt, except “those spreads have not really normalized yet.”

Lomuto sees a lot in the data “symptomatic of macroeconomic uncertainty, thin trading volumes, and more noise in the data.” This is a case of time eventually telling.

Listing activity was up about 27% compared to 2023. Ads are coming down about 26% faster than at the same time as last year. Again, hard to tell now whether that is good news or sellers pulling out faster, but it could be a sign of faster transactions.

Also, triple-net inventory has seen 3.5% to 4% in each of the last two months. “If that type of growth repeats in April, it may push us past the inventory peak we saw in November.”