Net Lease & Sale-Leaseback Trends: Investment Shifts Amidst Higher Rates

By Majid Radaei, RadCRE · · Market Updates

Net lease and sale-leaseback transactions saw a 25% year-over-year decline in Q1 2026, totaling $12.3 billion, as investors recalibrate for persistent high interest rates and cautious underwriting.

Net Lease & Sale-Leaseback Transactions: Q1 2026 Review

The net lease sector, often prized for its stable income streams and long-term tenancy, has experienced a notable recalibration in the first quarter of 2026. According to recent data compiled by CoStar and published across various industry outlets, investment volume in single-tenant net lease (STNL) properties, including sale-leasebacks, totaled approximately $12.3 billion. This represents a significant 25% year-over-year decrease compared to Q1 2025, and a starker decline from the peak activity observed in 2021 and 2022.

Impact of Elevated Interest Rates and Lending Environment

The primary driver behind this downturn remains the elevated cost of capital. With the Secured Overnight Financing Rate (SOFR) hovering around 4.31% and Prime at 8.50%, debt service coverage ratios (DSCRs) have tightened considerably. Investors, particularly those relying on heavily leveraged strategies, are finding it challenging to achieve their targeted yields. This has led to a widening bid-ask spread, slowing transactional velocity.

CMBS spreads, while showing some signs of stabilization, are still pricing in higher risk premiums compared to pre-2022 levels, typically ranging from Term SOFR + 150-300 basis points for stabilized assets. For more nuanced net lease credit tenants or development-stage projects, bridge loans with spreads of SOFR + 300-600 bps are prevalent, often coupled with stringent recourse requirements.

Sectoral Performance and Investor Preferences

Within the net lease segment, essential retail and medical office properties continue to demonstrate relative resilience. Q1 2026 saw cap rates for high-quality, investment-grade essential retail assets average 6.25% to 6.75%, a slight upward drift from late 2025 but holding relatively firm due to their defensive characteristics. Medical office buildings, bolstered by demographic tailwinds and necessity-driven demand, recorded average cap rates in a similar 6.00% to 6.50% range.

Conversely, non-essential retail and certain office net lease properties, particularly those with shorter remaining lease terms or B- to C-grade credit tenants, have seen cap rates push higher, sometimes exceeding 7.50% to 8.00%. This reflects increased perceived risk and reduced liquidity in those sub-segments.

Noteworthy Sale-Leaseback Activity

Despite the broader slowdown, strategic sale-leaseback transactions are still occurring, albeit selectively. Companies are leveraging their real estate to bolster balance sheets, fund expansion, or recapitalize operations without diluting equity. For instance, in Q1 2026, a major grocery chain reportedly executed a sale-leaseback of five of its distribution centers in the Southeast, a deal valued at approximately $300 million, to a private equity firm specializing in logistics infrastructure. While industrial assets are not RadCRE’s primary focus, this illustrates the ongoing demand for mission-critical facilities with long-term, absolute net leases even in a constrained capital market.

RadCRE Perspective

Majid Radaei, Founder of RAD Commercial Realty, notes, "While transactional volume in net lease and sale-leaseback properties has undoubtedly cooled, the underlying demand for stable, passive income streams hasn't vanished. What we're seeing is a flight to quality and a demand for more sophisticated underwriting. Investors are scrutinizing credit quality, lease structures, and residual values far more meticulously. For our clients, this translates into opportunities to acquire well-located assets with strong tenancy at more realistic cap rates than two years ago. We're actively structuring financing solutions that combine traditional bank debt with preferred equity to bridge the valuation gap and secure favorable terms, especially for hospitality assets with stable operating histories that can benefit from strategic sale-leaseback executions to unlock trapped equity."

RadCRE continues to advise clients on strategic net lease acquisitions and dispositions, identifying opportunities in this evolving market. Our expertise in underwriting complex lease structures and navigating the current financing landscape ensures optimal outcomes for investors seeking stable, long-term returns.

Tags: net lease investment, sale-leaseback trends, commercial real estate financing, cap rates, CRE capital markets

Sources: CoStar, Commercial Observer, Real Capital Analytics, JLL Research, Green Street Advisors