By Jeff Lefko of Hanley Investment Group Real Estate Advisors
For much of the last few decades, commercial real estate investors have operated under a simple assumption: interest rates rise, and cap rates rise with them. It is a straightforward relationship: intuitive, widely accepted and deeply embedded in underwriting models and investment committee discussions across the industry.
Yet in the net lease sector, the connection between interest rates and cap rates has been far less direct than many believe.
Since early 2022, the Federal Reserve has increased short‑term rates by more than 500 basis points, the fastest tightening cycle in four decades. Longer‑term borrowing costs remain elevated compared to the ultra-low-rate era of 2020 and 2021, even after the Fed’s rate cuts through 2025. Conventional thinking suggests net lease cap rates should have expanded sharply.
Instead, cap rates across much of the single-tenant and multi-tenant net lease market have risen only modestly relative to the scale of the rate increases. There has been movement in certain segments, particularly in secondary markets, shorter lease terms and lower credit tenants, but the broader market has moved far less than the headline rate increases alone would suggest.
This raises an important question for commercial real estate investors: If interest rates are the leading determinant of pricing, why haven’t net lease cap rates moved more proportionally?
Interest Rates Are Only One Variable in a Larger Pricing Equation
The performance of the net lease market over the last several years shows that interest rates matter, but they are certainly not the sole driver of value. Net lease pricing is shaped by a broader set of forces that often outweigh the cost of debt.
- Scarcity of quality inventory: High‑quality net lease assets remain difficult to replicate, especially in prime corridors with strong demographics and limited development opportunities. Long‑term leases reduce turnover, and investment‑grade tenants rarely relocate, creating structural scarcity that supports pricing even when borrowing costs rise. Low-rent ground leases are also less common and demand significantly outweighs supply.
- Institutional and private‑capital demand: Pension funds, REITs, family offices, 1031-exchange buyers and private investors continue to pursue stable, predictable income streams. These groups tend to operate with a different cost of capital, and many remain active regardless of temporary financing headwinds.
- Inflation protection: Contractual rent growth and hard‑asset ownership have become more valuable in an inflationary environment. Investors are not simply buying yield; they are buying durability.
- Credit and lease structure: A long‑term lease to an investment‑grade tenant is fundamentally different from a short‑term lease to a regional operator. The market prices risk, not just interest rates.
- Alternative investment yields: Net lease cap rates compete with Treasuries, equities, private credit, multifamily, industrial and other investment categories. While investors traditionally track the 10-year Treasury as a general benchmark for long-term real estate trends, the 5-Year Treasury is far more relevant to the net lease sector, especially in today’s market. Because typical financing structures for retail net lease assets center on five- to 10-year debt maturities (and five-year fixed terms are common in today’s financing environment), tracking cap rates against 5-Year Treasury yields provides a clearer picture of real-time spreads and leverage dynamics.
- Tax-driven demand: Bonus depreciation has also helped keep values steadier in certain essential‑service categories, particularly car washes and convenience stores with fuel, where accelerated tax benefits continue to support pricing even as borrowing costs fluctuate. Demand for these assets often intensifies in the second half of the year as investors seek to maximize year‑end tax advantages.
These dynamics help explain why net lease real estate has not behaved like a simple financial instrument tied directly to interest‑rate movements.
The Spread Story: Investors Are Rewriting an Old Rule
Average net lease cap rates rose only modestly before stabilizing in the high-6 percent range, even as Treasury yields moved sharply higher, keeping spreads far tighter than traditional models would predict.
For decades, many investors evaluated net lease pricing through the spread between cap rates and Treasury benchmarks (traditionally the 10-year Treasury, though five-year Treasuries offer a more precise comparison for net lease debt terms). During the ultra-low-rate years, that spread was historically wide, as cap rates sat well above near-zero Treasury yields. Many expected the spread to widen again as rates increased.
But today’s market suggests something different.
As Treasury yields rose sharply beginning in 2022, spreads compressed significantly, tightening from nearly 400 basis points to below 200 basis points within the same year. Since then, spreads have remained range‑bound, generally fluctuating between 200 and 300 basis points, even as interest rates continued to move. In other words, cap rates have not risen proportionally with Treasury yields, keeping spreads far tighter than traditional models would predict.
Investors appear willing to accept these tighter spreads for assets they view as essential, durable and irreplaceable. A McDonald’s, Chick‑fil‑A or grocery‑anchored center in a premier location often commands pricing well above what a simple spread calculation would imply.
A related trend reinforcing this certainty premium is the market’s clear flight to quality. Investors are concentrating capital in low‑rent, long‑term ground leases with essential tenants, while higher‑rent build‑to‑suit deals are facing more pushback, not because of interest rates alone, but because elevated rents introduce more long‑term risk. That behavior is most visible across geography: demand continues to cluster in premium states where population growth and business migration support confidence, and high‑rent deals in non‑premium states must be priced with sharper discipline to earn attention. In every case, the driver is the same: investors are prioritizing predictability over yield.
This shift reflects a deeper truth: investors are not only buying yield, they are also buying certainty.
The Disconnect Between Rates and Cap Rates
While the 10-year Treasury serves as a broad market sentiment gauge, comparing single-tenant net lease cap rates to the 5-Year Treasury yield offers a much more direct view into the debt and equity drivers shaping the retail net lease sector today.
The data since 2022 shows a clear divergence: interest rates rose sharply, while cap rates increased only modestly. As a result, the yield spread between single-tenant net lease cap rates and five-year Treasuries compressed less than the scale of the rate increases would suggest. While spreads have fluctuated, they have remained far wider than traditional historical models would predict, which indicates that cap rates have lagged behind the rise in Treasury yields rather than tracked it.
The comparison reinforces a central theme of today’s market: the relationship between interest rates and pricing exists, but it is far weaker, far less linear, and far more range-bound than traditional models suggest.
Net Lease Real Estate Is Behaving More Like Infrastructure
One of the most important lessons of the last three years is that high‑quality net lease real estate behaves less like a leveraged financial product and more like infrastructure.
Investors increasingly value:
- Predictable cash flow
- Inflation‑resistant income
- Tenant credit strength
- Long‑term lease structures
- Simplicity of ownership
- Essential retail categories
- Strong underlying real estate fundamentals
These characteristics support value regardless of the interest rate environment. They also help explain why net lease cap rates have not moved in lockstep with interest rates.
A More Accurate Question for Today’s Market
The last several years have proven the real determinants of value remain what they have always been: location, credit, lease structure, supply constraints and investor demand. These fundamentals continue to anchor pricing for single‑tenant net lease and multi‑tenant retail assets, even as interest rates remain elevated.
Perhaps the better question isn’t where interest rates are going, but how much investors are willing to pay for greater certainty.
— By Jeff Lefko, executive vice president and partner at Hanley Investment Group Real Estate Advisors. This article was originally published in the September 2026 issues of Shopping Center Business and Western Real Estate Business.