2023 was a complex year and difficult to predict at times. The past year has brought challenges, beginning with uncertainties, then enduring market fluctuations and heightened rates. The unpredictability of the economy and geopolitics added more fuel to the fire. The commercial real estate market has undoubtedly evolved and yet the net lease investment market still seems to be a highly attractive option moving into 2024.
Impacts of 2023
Over the previous year, we experienced increased rates, putting a strain on investors’ debt service and eating away at returns. Most strategies were to avoid risks and reposition where possible. However, no one is expecting the market’s full recovery during a one-year turnover. The reality of high interest rates continuing has put pressure on the pricing expectation gap between buyers and sellers. With increasing cap rates, buyers were offering lower purchase prices, but sellers found it difficult to accept.
Interest rate did affect net lease transactions as we experienced a slowdown in 2023, following outstanding performance years of 2021 with volumes over $100B, and about $70B in 2022.(2) New construction also decreased, but property owners in Florida, Texas, Tennessee and similar markets encountered vacancy rates that were relatively low, just under 5%. Even with decreasing construction deliveries, the retail sector is likely to continue its current activities and steady vacancy. Industrial will also remain stable – construction pipeline for industrial is predicted to return to pre-pandemic levels within the next two years, decreasing vacancy consequently. (3)
Recession or Resilience
Although there is an extended slowdown expected through the next 12 months, with the office sector leading the declining trend, there is evidence the US will steer clear of an impacted recession. Additionally, investment activity is likely to stabilize starting H2 2024.(2)
Industries such as healthcare, food & beverage (F&B), and discount retail are solid choices during economic uncertainty. Retail has proven to show great strength in 2023 and is effectively aiding in the avoidance of recession due to consumer spending. The high number of store openings gives promise with discount stores contributing about 1,800 openings. Heading into 2024, consumers are looking to capitalize their dollar. Retail vacancies are not expected to increase by more than 1 percentage point.
Forecasts for Top Markets
Focusing on high-quality properties and tenants will achieve best results in 2024 withstanding long-lasting high interest rates. Market preferences will also be taken into consideration. The southern region still holds the top spots for best net lease markets to invest in. According to a 2023 report carried out by PWC, the top three markets are Nashville, Phoenix, and Dallas/Ft. Worth, respectively.
Nashville’s success has exploded over the recent years for its increasing population and employment opportunities. As part of the SunBelt region, Phoenix offers many benefits for investors with a prominent fast-growing market and wide variety of industries. Dallas and Ft. Worth landed as #3 on the list of highly-watched markets. With such a large population, the market is likely to perform well for investors considering the continuously increasing job market. Investors are attracted to these strong economic factors.
Conclusion
Reflecting on the challenges of 2023 in the net lease market puts into perspective the emphasis on a secure investment strategy for the future. Although 2024 may not be smooth sailing, net lease properties stand out as a reliable opportunity for predictable cash flow, risk mitigation, and long-term stability. Investors looking to diversify or enhance their portfolio will consider all viable options with a market professional to achieve specific goals throughout a shifting real estate landscape. Together, we can turn challenges into opportunities for growth and prosperity in the years to come.
Our Firm
Ready to elevate your real estate portfolio? Connect with us at Winston Warren today, and harness our expert insights to transform your real estate ventures. Our strategic approach to site selection and investment in net lease properties isn’t just about finding a location—it’s about crafting your success story in the real estate market. Let’s embark on this journey together and turn your investment goals into tangible, profitable realities. Contact us now and take the first step towards unlocking your investment potential with a team that prioritizes your success as much as you do!
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