Net Lease Grabs More Volume

While net-lease investment fell significantly in the second quarter, the sector also took its largest share ever of commercial real estate volume, according to the latest research from CBRE.

The net lease sector, which includes office, industrial and retail properties, posted 20.2% of total commercial real estate volume in Q2. In Q1, it secured 13.3% of total CRE volume, which is the sector’s highest percentage on record.

CBRE attributed the sector’s strength to “investors’ attraction to the long-term leases and creditworthy tenants considered safe attributes during an economic downturn.”

The second quarter wasn’t the only time that investors have flocked to net lease in periods of economic turbulence. In 2007, net lease took 6.9% of total commercial real estate volume. In 2009, that share increased to 14.9%. 

“Similar to the GFC [Great Financial Crisis] trend we experienced over a decade ago, net lease investment continues to attract demand during this downturn as investors are seeking long-term dependable cash flows,” said Will Pike, vice chairman of Net Lease Properties for Capital Markets at CBRE in recent commentary. “We are seeing an uptick in capital requests for long-term net-lease assets and sale-leaseback financing opportunities.”

As the economic situation improved, other sectors gained a higher percentage of CRE volume. Since 2012, net-lease properties’ share of total commercial real estate investment volume has been in the 11% to 13% range.

While net lease gained a more significant share of CRE investment, overall volume still declined, dropping 61.8% year-over-year to $8.1 billion in Q2 2020 as the COVID-19 economic downturn stalled commercial real estate transactions. Still, the decline for total U.S. commercial real estate over the same period was more profound at 69.9%.

The average net-lease cap rate remained at 6.3% in Q1. CBRE attributed this to sellers’ and buyers’ pricing being too far apart. “COVID-19 led to a wider bid-ask gap, which stalled price discovery and slowed investment activity,” CBRE said in the report.

Overall, Chicago, Philadelphia, Los Angeles, the Inland Empire, Calif., and Dallas/Ft. Worth posted the most net-lease volume in the second quarter. CBRE noted that investors showed increasing interest in secondary and tertiary markets. Memphis (96%), Austin (68.5%), San Antonio (62.3%), Philadelphia (51%) and Cincinnati (50.5%) posted some of the largest quarterly gains.

With the increasing volume in e-commerce, the industrial sector has outpaced other CRE sectors during the COVID-19 pandemic. That’s why it shouldn’t be a big surprise that industrial’s share of total net-lease investment increased to 48% in Q2 2020. 

Retail’s share of net lease volume fell from 28.7% to 25.4% YOY. CBRE noted that investors remained attracted to retailers that provide essential services, such as pharmacies and grocery stores. As many offices sat empty in the quarter, net lease office fell to 26.6% from 37.2% YOY.