US Net Lease Outperforms Broader CRE Market

Los Angeles—US net-lease investment is outpacing the broader commercial real estate market in 2019, with increasing demand from both foreign and domestic investors for office and industrial assets, according to CBRE.

Net-lease investment—comprising office, industrial and retail properties—climbed 17.2% year-over-year in the first half of 2019 to $33.4 billion, with total commercial real estate volume growth at 13.4% over the same period, CBRE reported.

Net-lease investment volume in Q2 2019 was the second-highest quarterly total on record at $20.6 billion and up by 33.8% year-over-year. Net-lease investment volume for the year-ending Q2 2019 totaled $74.2 billion—the highest four-quarter total since CBRE began tracking the market in 2002.

“The high volume of net-lease activity has been a byproduct of an aggressive capital markets environment coupled with an influx of capital, both foreign and domestic, seeking compelling risk-adjusted returns,” said Will Pike, vice chairman of Net Lease Properties for Capital Markets at CBRE.

CBRE said that the net-lease investment volume for the past quarter was driven by gains in the office sector (65.7% year-over-year growth) and retail (52.2%), while industrial remained nearly unchanged (0.6%). At the same time, investors are increasingly focused on net-lease investment opportunities in high-growth secondary markets. While gateway markets like San Francisco and Boston had the largest year-over-year gains in investment volume in Q2 2019, markets such as the Inland Empire, San Diego and the East Bay made the top-10 list.

Cross-Border Net-Lease Investment

In addition to domestic demand, the global search for yield and portfolio diversification is also attracting global investors to the US net-lease market. Cross-border capital for net-lease properties reached $3.9 billion in Q2 2019⁠—a 78.4% increase from Q2 2018 and the second-highest quarterly total on record, according to CBRE.

International buyers accounted for 18.8% of net-lease transaction volume in Q2 2019—their highest share since 2015. New York City, San Francisco, Miami, Houston, Los Angeles and Chicago received the most foreign capital for net-lease investment. Over the past two years, the top country sources of capital have been Canada, Germany and South Korea.

Foreign investment in US net-lease properties has averaged more than $8 billion annually over the past four years from approximately $3 billion annually between 2011 and 2014.