The top countries of origin for foreign investment in US net-lease properties from 2016 to 2018 were Canada ($5.55 billion), South Korea ($3.28 billion) and China ($3.22 billion). These three countries accounted for more than half of all foreign investment in the US net-lease market over this period.

Canadian and Chinese investors primarily targeted industrial properties, while South Korean investors overwhelmingly preferred office product.

What's Next?

US net-lease transaction volume is expected to remain elevated in 2019, with increasing investor demand for net-lease office and industrial assets. Rising demand for US net-lease real estate led to $68.3 billion in investment volume in 2018—the highest annual total since CBRE began tracking the market in 2002. Net-lease acquisitions' share of overall commercial real estate volume has been in the 11%-to-12% range since 2012, suggesting sustained strong investor demand in the sector.

Overall net-lease capitalization rates are expected to remain stable for the rest of 2019. Spreads over Treasuries have been gradually tightening since 2012 and narrowed to 321 basis points last year with rising interest rates. Recent decreases to the 10-Year Treasury rate brought the Q1 2019 spread to 386 bps.

Appeal of Secondary Markets

Risk aversion is driving demand for this asset category, whose hallmark is the long-term nature of the leases and the credit underpinning the tenants, Pike said.

Pike also noted that investors are increasingly focused on net-lease opportunities in high-growth secondary and tertiary markets. “While gateway markets like New York City, Washington, DC and Chicago had the largest gains in investment volume last year, markets such as Phoenix, Seattle, Baltimore, Columbus and Atlanta have seen significant growth,” he said.