Net Lease Investment Outperforms Total CRE Sales in Q3

Investment in US net-lease properties increased by 24.4% quarter-over-quarter in Q3 2020 to $11.7 billion, according to the latest research from CBRE.

Still, Q3 total net lease volume declined by 50.6% year-over-year in Q3 2020. CBRE says the decline for total US commercial real estate over the same period was 59.5%.

The average net-lease cap rate was unchanged at 6.2% in Q3, which CBRE attributed to limited investment activity. It noted that COVID-19 led to a disconnect between buyer and seller expectations, which stalled price discovery and slowed investment activity.

Often in recessions, net lease gains a larger share of the CRE transaction market. This year is no different. The five-year average of net lease’s share of all commercial real estate investment activity is 11.8%. But in Q3, it was 18.4%, according to CBRE.

During the Great Financial Crisis, net lease’s share of total commercial real estate volume increased to 14.9% for full-year 2009 from 6.9% for full-year 2007. Since 20212, net-lease properties’ share of total commercial real estate investment volume has been in the 11%-to-13% range.

The office sector’s share of Q3 net lease investment increased 1.1 percentage points from the year-earlier Q3 to 33.6%. Retail’s share grew 5.4 percentage points to 23.2% over the same period, while industrial accounted for 43.2% of net-lease investment activity. Industrial fell 6.6 percentage points, which CBRE attributes to tight market conditions causing an increase in asset pricing.

“Investors are seeking mission-critical, investment-grade office assets secured under long-term lease agreements,” Will Pike, vice chairman of Net Lease Properties for Capital Markets at CBRE, tells GlobeSt.com. “While a lot of tenants are not fully occupying their space, investors are displaying confidence that users will come back for collaboration and a lot of the initial lease expirations are 10 to 20 years from now.”

Despite COVID-19 related travel restrictions, Q3 2020 foreign investment volume still rose by 13.3% to $868 million compared to Q2. CBRE says Canada, Switzerland, Saudi Arabia and Kuwait are the top countries for inbound capital in US net-lease properties over the past year, accounting for almost two-thirds of all foreign investment in the sector. Pike tells GlobeSt.com that “flight to safety to US net lease investments given the favorable risk-adjusted returns” is driving this interest.

Large gateway cities remain targets for net lease investors, but the biggest increases occurred in smaller markets. New York City, Dallas/Ft. Worth, Boston, Los Angeles and Orange County had the most net-lease investment volume in Q3. But Oklahoma City (+160.3%), Memphis (+96.0%), Greenville (+67.1%) and Kansas City (+53.1%) and posted the largest percentage gains.

Pike says many of these trades are occupier driven. “A lot of these trades were backed by investment-grade credits,” he says.