Tenant Oversupply Wipes Out Developer Profits in Net Lease

Written by:

Rudi Davis

Date:

25 Jan 2026

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The net lease development market is facing a sharp correction as oversupply in key tenant categories collides with higher interest rates and a more cautious buyer pool. Projects underwritten in the low-rate environment of 2022 and early 2023 are now struggling to sell at prices that provide any meaningful developer profit, leaving legacy inventory to compete directly with new product priced for today’s market.

Dave Wirgler, Vice President at Sands Investment Group, says the problem is most visible in specific high-volume tenant categories. “If you look at Starbucks, there’s about 200 new construction Starbucks on the market right now,” Wirgler notes. Oversupply, combined with a sharp increase in cap rates, has made these deals extremely difficult to sell at a profit.

The Impact of Tenant Oversupply

When a tenant category becomes saturated, pricing power disappears. Wirgler points to Dutch Bros as an example: “They don’t have nearly the same volume of inventory on the market as a Starbucks. But if you usually see 25 to 35 new units and suddenly there are 70, that’s oversupply—especially when buyers are hesitant.”

Even modest increases in available properties can have an outsized effect in a market where many investors remain on the sidelines, waiting for signs of stability or better returns.

How Cap Rate Shifts Wiped Out Profits

The core issue for developers is the speed and scale of cap rate increases. Projects often take 18 to 24 months from breaking ground to hitting the market. Many were underwritten in 2022 with the expectation of selling at cap rates between 5.25% and 5.5%. Today, buyers expect cap rates of 6.25% or higher for the same properties. That difference—100 to 150 basis points—erases nearly all of the developer’s expected profit.

For tenants like Starbucks, 7-Eleven, and Dutch Bros, Wirgler says the change has been dramatic. “Cap rates shifted 100, 150, maybe more on certain deals. That wiped out every spread that a developer would have in a deal, and that became very problematic.”

Developers who focused on these tenets during the low-rate period are now facing significant losses. “There’s been a lot of pain,” Wirgler says. “They may have made a lot of money when the market was in their favor, but much of that was lost in the last couple of years.”

Legacy Inventory Faces New Competition

The challenge is compounded by the overlap of unsold legacy inventory with new projects hitting the market. Properties underwritten in 2023 and 2024 are now competing with deals from 2026 and 2027 that reflect current cap rate expectations. As Wirgler puts it, “Any legacy product that still hasn’t sold from ‘23 and ‘24 is going to start bumping up against product that’s coming out in ‘26 and ‘27 that is appropriately priced.”

In practice, this means older projects are either sold at a loss or sit on the market for extended periods. During the worst of the cycle, Wirgler tracked average days on market for new construction products exceeding 200 days—a clear sign that seller expectations remain out of sync with buyers’ willingness to pay.

Shift Toward Low-Risk, High-Demand Tenants

This period of oversupply and price compression has forced developers to abandon riskier tenant profiles and focus on categories with the broadest buyer appeal. “Developers coming out of the last couple of years really decided to say, ‘I’m not taking a risk on lower credit tenants or tenants where I get burned. I’m not taking a risk on tertiary markets unless I truly understand them and can underwrite them correctly. I’m going to focus on core competencies and assets that can move in the market.”

The safest bets remain fast-food restaurants and convenience stores, which dominate net-lease transaction volume. These categories attract steady buyer demand thanks to their strong brand recognition and perceived resilience, even if the underlying tenant credit is sometimes weaker. Still, Wirgler cautions that even top brands are not immune to mispricing. “Just because it’s a Chick-fil-A doesn’t mean it’s a good deal when somebody’s trying to get a 3.75% cap, and the market is clearly no longer there.”

Developers Become More Cautious

The recent market turmoil has changed how developers approach new deals. According to Wirgler, many are “a little scared of the market” and now show much greater risk aversion, especially on larger projects with significant equity at stake. Developers increasingly seek out equity partners to share risk, recognizing that the era of taking on full project exposure for maximum potential returns is over—at least for now.

Discussions about risk-sharing and partnership structures have become routine, reflecting a broader shift toward more conservative underwriting and deal structuring.

Signs of Stabilization

Despite ongoing challenges, there are early indications that the market may be reaching a new equilibrium. Cap rates have stopped climbing and have even compressed slightly in some segments over the past several months. “Over the past several months, cap rates have really started to stabilize. Many of those segments have actually compressed a hair, not a noticeable amount, where we’re all running to the bank and cashing bigger checks. Still, even three to five basis points lower yield compared to what we went through with the back half of ‘22 to ‘25, that’s very, very good news,” Wirgler says.

A Necessary Correction

The net lease development sector’s oversupply crisis has forced a painful but necessary correction. Developers are now far more disciplined, focusing on accurate underwriting, realistic risk assessment, and partnership-driven deal structures. The lessons of the past three years have reshaped how projects are conceived, financed, and brought to market.

Looking ahead, the sector’s return to profitability will depend on sustained pricing discipline, a continued focus on high-demand tenants, and a willingness to walk away from deals that don’t pencil out in the current environment. Developers who adapt to these realities are likely to emerge stronger, with a more sustainable approach to risk and return. Those who cling to outdated pricing or ignore market signals risk being left with unsold inventory and further losses. The market’s current pain may ultimately lay the groundwork for a healthier, more resilient net lease sector in the years ahead.