The net lease investment market enters 2025 with a shifting landscape influenced by rising cap rates, evolving tenant demand, and macroeconomic conditions. Investors, property owners, and brokers face new challenges and opportunities as the market adjusts to changing interest rates, inflationary pressures, and sector-specific trends.

Despite these fluctuations, net lease properties continue to attract capital due to their long-term lease structures, passive income potential, and relative stability in uncertain economic conditions. However, success in this environment requires a keen awareness of cap rate movements, transaction volume trends, retail sector performance, and the broader economic forces shaping the market.

This analysis consolidates insights from recent industry reports and market data to objectively examine the key trends impacting net lease investments in 2025.

Cap rate trends and investor activity

Over the past year, cap rates for single-tenant net lease properties have continued to rise, reflecting a shift in investor expectations and adjustments in pricing. The Boulder Group's Q4 2024 Net Lease Market Report indicates that cap rates increased for the eleventh consecutive quarter across all three sectors: retail cap rates rose to 6.52% (+2 basis points), office to 7.78% (+3 basis points), and industrial to 7.23% (+8 basis points).

This cap rate expansion is driven by multiple factors, including sustained high interest rates and growing property inventory on the market. While some investors see rising cap rates as an opportunity to secure higher yields, others are cautious due to financing constraints and uncertain economic conditions.

A Market Adjusting to Higher Inventory Levels

A slower transaction pace has resulted in a record level of unsold inventory, with more net lease properties hitting the market every day. Even historically favored investment targets are sitting on the market longer than usual as buyers and sellers navigate pricing expectations.

With more properties available, competition among sellers is increasing. Assets that previously would have been absorbed quickly are facing longer marketing periods, and some landlords are adjusting asking prices to attract offers. For buyers, this means a broader selection of properties, but also a more competitive environment when bidding on high-quality assets.

Interest Rate Environment: Mixed Sentiment Among Investors

Interest rates remain one of the most significant factors influencing cap rates and investor sentiment. Today’s borrowing rates hover around 6.00%, depending on the strength of the guarantor and remaining lease term — a stark contrast from the 3.00% range five years ago [verify current Fed data].

Although some analysts anticipate rate cuts later in 2025, mixed investor sentiment remains:

Pro-Rate Cut Perspective: Lower interest rates would reduce financing costs, making acquisitions more attractive and potentially compressing cap rates again.

Cautious Perspective: Some investors worry that if rate cuts stimulate more deal flow, pricing could become more competitive, reducing the advantage of higher cap rates currently available.

Institutional buyers, in particular, are waiting to see how rates and cap rates evolve before making large acquisitions.

The Decline of the 1031 Exchange Market

Many investors who would typically trade into passive income-generating net lease properties via a 1031 exchange are choosing to wait until debt market conditions improve. The sharp rise in borrowing costs has significantly impacted those carrying forward debt, as higher loan rates cut into bottom-line income.

For landlords looking to sell and exchange into a new net lease asset, the cap rate spread must be wide enough to justify taking on new financing.

Until loan rates stabilize or decrease, some property owners are delaying 1031 exchanges, leading to fewer high-net-worth individuals participating in the market.

Institutional Buyers Are Cautious, Affecting Liquidity

Institutional investors — who traditionally acquire large net lease portfolios — have been more selective in 2024 and early 2025. Many are holding back on acquisitions, waiting to see how interest rates, cap rates, and transaction volume evolve before making major moves.

This caution has created opportunities for private investors and family offices, which are stepping in to acquire value-add opportunities in secondary markets, where cap rates are often more favorable.

Key Takeaways for Investors

Cap rates are rising, and institutional buyers are more selective, creating opportunities for well-capitalized private investors.

More inventory on the market means greater selection for buyers, but also increased competition among sellers.

Interest rate uncertainty is leading some investors to pause acquisitions, while others see an opportunity to lock in higher yields before rates potentially decrease.

1031 exchanges have slowed, as many investors are waiting for debt market conditions to improve.

While the net lease market is undergoing a period of recalibration, investors who remain strategic and adaptable can leverage these shifting conditions to build stronger, more resilient portfolios in 2025.

Net lease transaction volume and market liquidity

The final quarter of 2024 saw a significant net lease transaction activity increase as investors adjusted to evolving market conditions. CBRE reports that net-lease investment volume increased by 5% quarter-over-quarter and 7% year-over-year in Q3 2024 to $10.4 billion.

This uptick in transaction volume suggests that investor confidence remains strong despite higher borrowing costs. Many buyers are actively pursuing acquisitions in response to rising cap rates, viewing the current environment as an opportunity to lock in higher yields. At the same time, sellers who are motivated to divest are adjusting their pricing expectations, contributing to increased deal-making.

Another factor driving activity is the increased availability of financing for net lease assets. While lenders remain cautious, particularly in certain retail segments, debt markets have begun to stabilize, making capital more accessible for well-qualified borrowers. Loan-to-value ratios and debt-service coverage requirements have tightened compared to previous years, but investors with strong balance sheets continue to find opportunities.

The composition of buyers in the market is also evolving. Institutional investors remain active but are focusing on core assets with creditworthy tenants and long lease terms. On the other hand, private investors and family offices are stepping in to acquire value-add opportunities and assets in secondary markets, where cap rates are often more favorable.

Retail sector performance and shifting demand

The retail net lease sector continues to experience significant shifts, with performance varying widely by tenant category. Discount retailers have emerged as one of the strongest-performing segments, with consumer foot traffic increasing in response to economic uncertainty and inflationary pressures.

Placer.ai data indicates that discount chains such as Dollar General, Aldi, and Burlington saw increased store visits in 2024, reflecting a sustained preference for value-oriented shopping options. GlobeSt.com reports that this trend is expected to continue into 2025, with discount retailers maintaining expansion plans despite broader economic headwinds.

The quick-service restaurant and convenience store sectors are also attracting significant investment, with franchise-backed tenants offering strong lease guarantees and resilient business models. Marcus & Millichap's analysis highlights that demand for drive-thru locations and gas station-convenience store hybrids remains high, particularly in suburban and highway-adjacent locations.

At the same time, some retail categories are experiencing contraction. Store closures from Big Lots, Party City, and other struggling brands have created leasing challenges in various markets. However, expanding retailers such as Ollie's Bargain Outlet and Burlington are actively backfilling vacant spaces, creating opportunities for landlords willing to reposition their properties.

Investors looking at retail net lease properties must carefully assess tenant creditworthiness and long-term viability. While essential retail and discount-driven concepts continue to perform well, discretionary retail categories face ongoing pressure from e-commerce and changing consumer preferences.
 
Grocery and big-box retail: Impact of the canceled Kroger-Albertsons merger

The $24.6 billion Kroger-Albertsons merger, which was canceled, has had implications for net lease landlords in the grocery-anchored retail sector. GlobeSt.com reports that the failed merger is largely viewed as a positive outcome for landlords, as it preserves existing lease structures and prevents potential disruptions from store closures or consolidations.

Grocery-anchored centers remain among the most desirable net lease investments due to their consistent foot traffic and long-term lease agreements. With the Kroger-Albertsons deal off the table, competitors in the sector may pursue their own expansion strategies, leading to increased leasing activity in select markets.

Economic factors shaping the net lease market in 2025

Macroeconomic conditions will play a crucial role in shaping the net lease investment landscape in 2025. While inflation has moderated from its peak, cost pressures remain a concern for retailers and landlords. Rising operational expenses, including property taxes, insurance, and maintenance costs, may influence lease negotiations and tenant creditworthiness.

Interest rates remain a primary factor affecting net lease valuations and transaction activity. While some analysts predict potential rate cuts in the second half of 2025, borrowing costs are expected to stay elevated compared to pre-2022 levels. Investors must carefully evaluate financing structures and debt terms to ensure long-term stability.

The broader retail landscape is also evolving, with e-commerce integration and omnichannel strategies playing a growing role in leasing decisions. Many retailers are adopting hybrid models that combine physical stores with digital fulfillment capabilities, influencing site selection and lease structures.

Positioning for NNN success

The 2025 net lease investment market presents opportunities and challenges for investors, property owners, and brokers. Cap rate expansion is creating attractive acquisition opportunities, while increased transaction volume signals strong investor interest. However, evolving tenant demand and macroeconomic factors require a strategic approach to asset selection and portfolio management.

Retail net lease investments remain a key focus, with discount retailers and QSR tenants outperforming other segments. Grocery-anchored centers continue to be a stronghold for investors seeking long-term stability, while store closures in certain categories present repositioning opportunities.

Economic conditions, particularly interest rates and inflation, will shape investment decisions throughout the year. Investors who stay informed, conduct thorough due diligence, and adapt to shifting market dynamics will capitalize on the evolving net lease landscape in 2025.