Trepp | Despite Higher Rates, Net-Lease Retail REITs Stay on a Buying Spree

Many retail property-owning REITs reported third-quarter earnings in recent weeks, and the five specialists in net-leased retail properties had one thing in common: They were busy buying.
Given the relative dearth of construction in the retail sector—Marcus & Millichap puts the construction pipeline at a mere 0.3% of existing inventory at midyear—it’s not surprising that capitalization rates didn’t necessarily increase during the latest quarter, despite the higher cost of capital. The 10-year Treasury yield averaged 4.76% in the third quarter, up from 4.42% in the second.

NNN REIT Inc., for instance, completed $221.7 million of acquisitions during the latest period at prices resulting in a 7.3% cap rate, unchanged from the second quarter and last year. Essential Properties Realty Trust bought $342.2 million of properties at a weighted average cash cap rate of 7.7%, down from the 8% rate on acquisitions a year earlier.
The one exception was Agree Realty Corp., which made $360 million of investments in 94 net-leased properties at a weighted average cap rate of 7.3%, up 30 basis points from the second quarter. The company expects cap rates to further increase.
That puts the company’s experience at odds with its counterparts. But its definition of cap rate is different as it takes into account contractual fixed rents on a straight-line basis over lease term. As straight-line rents include future rent bumps, it’s number naturally would be higher than those reported by others, whose cap rates were reported as initial cash yields.
Meanwhile, Agree’s portfolio of 2,888 properties totaling 61.1 million sf is weighted toward large-format stores. Walmart, for instance, is a tenant at 5.6% of its portfolio, and Tractor Supply occupies 4.6%. The other REITs tend to own smaller-format properties.
The national vacancy rate for the retail sector is 4.3%, according to Colliers, which noted that 10.5 million sf of space was absorbed during the period, marking the healthiest quarter since 2023.
Occupancy rates for properties owned by net-lease REITs are astronomical. NNN REIT Inc., which owns 3,817 properties totaling 50.8 million sf, has a 99.2% occupancy rate; Essential Properties Realty Trust Inc., with 2,580 properties totaling 29.3 million sf, has a 99.6% rate; and Getty Realty Corp., with 1,269 convenience stores and automotive retail properties, has a 99.7% rate.

Compliments of Trepp – a premium member of EACCNY