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.
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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.
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Leslie Shaver
Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.
