SoCal Ranks Among Top Markets for Net Lease Investment

Los Angeles and Orange County are among the top investment markets for net lease assets, according to a recent report from CBRE. Los Angeles ranked fourth in the survey with $3.3 billion invested in 2018, and increase of 38% over the previous year, while Orange County ranked 13^th in 2018 with $1.7 billion invested last year.

“The net lease retail markets in Los Angeles and Orange County are some of the strongest in the country due several factors, including dense populations, very high barriers to entry, strong incomes and solid job growth as well as good consumer spending,” Patrick Wade, SVP at CBRE, tells GlobeSt.com. “Additionally, drive-through businesses do especially well due to the population density and high traffic in these areas. There are challenges in getting new drive through permits approved in these markets, which makes existing ones incredibly valuable and creates barriers to competition.”

The report measured all net lease assets, office, industrial and retail properties, but quick service restaurants are the most popular net lease investments in the region. “The most popular net lease asset classes in the retail segment are quick service restaurants drive throughs, coffee drive throughs, grocery stores, and increasingly fitness outfits,” says Wade.

Despite the high level of activity, there are limited opportunities for net lease investment, and that is especially true for quick service assets. The dynamic has driven competition up. “The supply for these types of deals are rare and therefore makes the competition fierce when available, particularly if there is a creditable tenant combined with a long-term lease,” says Wade. “We have had several deals in the last 24 months that we have sold where we had double-digit offers, including the lowest cap rate that Chic-Fil-A and Starbucks have ever sold at in la county.”

In addition, drive-through locations are becoming more difficult to build, further limited the product type. “Several cities have eliminated, or greatly reduced new drive through permits,” says Wade. “Since most quick service restaurants derive 60% to 80% of their sales through drive through, it has made these sites increasingly more valuable, which has only increased rents and investor desirability further.”

Due to the strength of the market and the popularity of net lease investment, Wade expects activity and demand to be strong through the end of the year. “We believe the demand for net lease assets across all categories will remain strong particularly in light of the direction the fed has taken and the anticipation that rates should stay low over the next 12 months,” he says. “There are limited alternative investment classes that offer safe returns with minimal management. Los Angeles and Orange County will continue to lead the nation in lower cap rates for this product type.”